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Bubbles and Crashes

Dilip Abreu and Markus K. Brunnermeier
Econometrica
Vol. 71, No. 1 (Jan., 2003), pp. 173-204
Published by: Econometric Society
Stable URL: http://www.jstor.org/stable/3082044
Page Count: 32
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Bubbles and Crashes
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Abstract

We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This synchronization problem together with the individual incentive to time the market results in the persistence of bubbles over a substantial period. Since the derived trading equilibrium is unique, our model rationalizes the existence of bubbles in a strong sense. The model also provides a natural setting in which news events, by enabling synchronization, can have a disproportionate impact relative to their intrinsic informational content.

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