Bianchi, Milo;
Jehiel, Philippe;
(2025)
Bubbles and Crashes with Partially Sophisticated Investors.
Mathematics and Financial Economics
10.1007/s11579-025-00402-5.
(In press).
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Abstract
We analyze bubbles and crashes in a model in which some investors are partially sophisticated. While the expectations of such investors are endogenously determined in equilibrium, these are based on a coarse understanding of the market dynamics. We highlight how such investors may endogenously switch from euphoria to panic and how this may lead to equilibrium bubbles and crashes even in a purely speculative market in which information is complete and it is commonly understood that the bubble cannot grow forever. We also show how this setting can match stylized empirical facts, and we investigate whether bubbles may last longer when the share of fully rational traders increases.
| Type: | Article |
|---|---|
| Title: | Bubbles and Crashes with Partially Sophisticated Investors |
| DOI: | 10.1007/s11579-025-00402-5 |
| Publisher version: | https://doi.org/10.1007/s11579-025-00402-5 |
| Language: | English |
| Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | BEHAVIOR, Bounded rationality, Business & Economics, Business, Finance, C72, Crashes, D84, Economics, G12, MARKETS, Mathematical Methods In Social Sciences, Mathematics, Mathematics, Interdisciplinary Applications, MEDIA, MODEL, Physical Sciences, PSYCHOLOGY, Science & Technology, Social Sciences, Social Sciences, Mathematical Methods, Speculative bubbles |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL SLASH UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10217974 |
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