Asset price bubbles and crashes with near-zero-intelligence traders

Summary. We examine whether a simple agent-based model can generate asset price bubbles and crashes of the type observed in a series of laboratory asset market experiments beginning with the work of Smith, Suchanek and Williams (1988). We follow the methodology of Gode and Sunder (1993, 1997) and examine the outcomes that obtain when populations of zero-intelligence (ZI) budget constrained, artificial agents are placed in the various laboratory market environments that have given rise to price bubbles. We have to put more structure on the behavior of the ZI-agents in order to address features of the laboratory asset bubble environment. We show that our model of near-zero-intelligence traders, operating in the same double auction environments used in several different laboratory studies, generates asset price bubbles and crashes comparable to those observed in laboratory experiments and can also match other, more subtle features of the experimental data.Received: 15 July 2003, Revised: 28 September 2004, JEL Classification Numbers: D83, D84, G12. Correspondence to: John DuffyWe would like to thank an Anonymous referee, Guillaume Frechette, David Laibson, Al Roth and participants in Harvard Experimental and Behavioral Economics Workshop for their comments, and Charles Noussair for providing his data set.     

Asset price volatility in a nonconvex general equilibrium model

Summary. Asset prices and returns are known to vary significantly more than␣output or aggregate consumption growth, and an order of magnitude in excess of what is justified by innovations to fundamentals. We study excess price volatility in a lifecycle economy with two assets (claims on capital and␣a public debt bubble), heterogeneous agents, and increasing returns to financial intermediation. We show that a relatively modest nonconvexity generates a set valued equilibrium correspondence in asset prices, with two␣stable branches. Price volatility is the outcome of an equilibrium selection mechanism, which mixes adaptive learning with “noise”, and alternates stochastically between the two stable branches of the price correspondence. Received: March 19, 1998; revised version: June 2, 1998     

Asset price bubbles from poorly aggregated information: A parametric example

We sketch a parametric example of bubbles, i.e., discrepancies between an asset's fundamental value (under full information aggregation) and market-clearing price. We demonstrate for our exponential/gamma example that bubbles exist and can exhibit momentum and overshooting for some values of the information parameters.     

Wage and price controls in the equilibrium sequential search model

In this paper, we study the effects of wage and price controls on employment, output, and welfare in a simplified version of the Bénabou (J. Econom. Theory 60 (1993) 140) equilibrium sequential search model with bilateral heterogeneity. We show that a price ceiling increases output but the change in welfare depends on three effects: the reduction in aggregate search costs, the increase in surplus due to increased output, and the transfer of production to the least efficient firm. The model is formally identical to a standard equilibrium search model of the labor market so analogous results hold for the minimum wage.     

Bootstrapping asset price bubbles

In this paper we propose a method that allows to test for asset price bubbles. The method is mainly based on a bootstrap methodology which helps to compute the finite sample probability distribution of the asymptotic tests which were recently proposed in Phillips et al. (2011) and Phillips and Yu (2009). We apply the method to the Nasdaq stock price index and Case-Shiller house price index. The results indicate that speculation was behind the upsurge in both asset prices.     

Intrinsic bubbles and asset price volatility

Summary Under what conditions is the price of a bubbly asset more (less) volatile than the asset's market fundamental? The answer depends on agents' attitudes towards risk. If higher current consumption makes agents more (less) risk averse in the future, then the bubbly asset price fluctuates less (more) than the fundamental. This result shows that the interaction between intrinsic bubbles and asset fundamentals critically depends on a feature of the utility function that does not appear in standard models with time-separable utility.Financial support from the Department of Economics at Texas A&M University, the Office for International Coordination at Texas A&M University, and the Deutsche Forschungsgemeinschaft, Sonderforschungsbereich 303 at the University of Bonn, is gratefully acknowledged. The views expressed are those of the authors and do not necessarily represent those of the International Monetary Fund.     

Credit policy and asset price bubbles

In this paper, we study the effectiveness of credit policy to stabilize the economy after a bursting asset price bubble. We estimate a DSGE model with an asset price bubble for the United States. We find that credit policy does stabilize the economy in response to a bursting asset price bubble. However, credit policy is less efficient in response to the bubble compared to a capital quality shock. The stabilizing effect on output is only roughly 30% for a bubble shock compared to a capital quality shock. Further, while credit policy increases the recovery speed for a capital quality shock it does not affect the recovery speed after a bursting bubble. We also find different dynamics under a binding zero-lower bound, but our previous qualitative findings remain unchanged.     

Determinants of stock price bubbles

In this paper we propose a cross-sectional model of the determinants of asset price bubbles. Using 589 firms listed on the NYSE, we find conclusive evidence that trading volume and share price volatility have statistically significant effects on asset price bubbles. However, evidence from sector-based stocks is mixed. We find that for firms belonging to electricity, energy, financial, and banking sectors, and for the smallest size firms, trading volume has a statistically significant and positive effect on bubbles. We do not discover any robust evidence of a statistically significant effect of share price volatility on bubbles at the sector-level.     

Asset bubbles,banking stability and economic growth

This paper examines the relationships between the asset bubble and the banking stability from both theoretical and empirical perspectives. The theoretical analysis demonstrates that the moral hazard caused by the deposit insurance and limited liability might facilitate the banks to hold bubble assets for the purpose of risk premium. Meanwhile the supervisory intensity, leverage ratio and credit spread provide the conditions for banks to hold bubble assets through their effects on risk premium. Once the banks hold the bubble assets, their stability will deteriorate because of four types of effects, namely internal leverage, cash withdrawal, credit friction and network effects. This paper also utilizes the BMA-PVAR model to test the theoretical findings by employing the data from 26 representative economies for a period between 2000 and 2014. The empirical evidences are consistent with the theoretical findings that the equity bubbles will lower the banking stability. The empirical evidences also suggest that the banking instability will be detrimental to the economic growth.     

Asset price volatility and government revenue

This paper investigates the effect of commercial, residential property and equity price volatility on the variability of cyclically adjusted government revenue. We find significant evidence that asset price volatility increases the variability of government revenue. A 1% increase in equity price volatility increases government revenue variability by 0.37–0.44%. An increase in residential property price volatility increases revenue volatility by about 0.15–0.22%, whereas this effect diminishes to 0.11% in case of commercial property price. This evidence reflects the automatic increase of government revenue variability due to asset price movements and supports arguments in favour of adjusting fiscal variables for both business cycle and asset price changes. However, we also find evidence that equity price variability increases revenue variability even when government revenue is adjusted for both economic and asset price cycles, indicating the presence of more complicated dynamics between fiscal variables and asset price changes.     

Cass transversality condition and sequential asset bubbles

Summary. The objective of this paper is to illustrate the connection existing between the asymptotic value of a certain random series and the absence of asset pricing valuation bubbles in stochastic economies with sequential markets. This series, in turn, is closely related to the one proposed by Cass to characterize efficient accumulation paths in Solow models.Received: 3 June 2003, Revised: 3 March 2004, JEL Classification Numbers: C61, C62, D51, G12.A first draft of this paper was presented at the V Conference of the Society for the Advancement of Economic Theory, Ischia, Italy, 2001. I am grateful to S. Spear and an anonymous referee for their valuable comments. This research was partially supported by MIUR (Ministero dellIstruzione, Universitá e Ricerca).     

General equilibrium, wariness and efficient bubbles

Wary consumers overlook gains but not losses in remote sets of dates or states. As preferences are upper but not lower Mackey semi-continuous, Bewley?s (1972) [4] result on existence of equilibrium whose prices are not necessarily countably additive holds. Wariness is related to lack of myopia and to ambiguity aversion (and, therefore, to Bewley?s (1986) [6] work on Knightian uncertainty). Wary infinite lived agents have weaker transversality conditions allowing them to be creditors at infinity and for bubbles to occur in positive net supply assets completing the markets. There are efficient allocations that can only be implemented with asset bubbles.     

Asset illiquidity and market shutdowns in competitive equilibrium

This paper introduces asymmetric information in a competitive asset market into a dynamic general-equilibrium model with borrowing constraints. In the presence of borrowing constraints, asset sales become a crucial means for agents to finance opportunities to invest in new assets. In this environment, reduced asset sales due to asymmetric information lower the economic growth rate if agents invest in new assets. The volume of asset trade, however, becomes zero if and only if agents stop investing in new assets because of sufficiently low aggregate productivity. A low economic growth rate with a market shutdown is solely due to low aggregate productivity without any role of the market shutdown.     

Asset arbitrage and the price of oil

It is commonly understood that macroeconomic shocks influence commodity prices and that one channel for this is the link between interest rates, expected future asset returns and stock-holding. In this paper the link is extended to the petroleum market with the recognition that recorded stocks of oil comprise a small share of annual demand and that the parallel with storable commodities is the decision to produce the oil in the first place, as opposed to holding it in the ground as reserve. Oil reserves are then a key asset in producing countries, which is arbitraged against financial assets. Thus, when the yield on financial assets falls, retaining oil reserves becomes more attractive to producing countries, which then have less incentive to accommodate demand rises, and so the oil price rises. This perspective on oil pricing is modeled in a dynamic multi-region general equilibrium framework in which regional households manage portfolios of assets that include oil reserves. When the model is calibrated to match observed data over two decades, simulation results indicate that asset arbitrage made a large contribution to the high pre-GFC oil price.     

Rationalizability and equilibrium in N-person sequential bargaining

Summary. This paper deals with N-person sequential bargaining games with complete information. For N-person sequential bargaining games, uniqueness of the SPE has been obtained by allowing the players to exit with partial agreements. Adopting a non-equilibrium approach, we show that N-person sequential bargaining games with exit are solvable by a refinement of rationalizability for multi-stage games (trembling-hand rationalizability) whatever the impatience of the players. That is, once we adopt the non-equilibrium approach, the exit opportunity still fulfils its original aim: we achieve a unique solution by introducing the exit opportunity. Moreover, this unique solution is the unique SPE. Received: October 30, 1996; revised version: July 7, 1998     

Asset price fluctuations without aggregate shocks

We analyze the pricing of a productive asset in a class of dynamic exchange economies with heterogeneous, infinitely-lived agents, and self-enforcing intertemporal trades. Individual incomes fluctuate and are correlated; preferences, dividends and aggregate income are fixed. Almost all economies in this class have a unique stationary Markovian equilibrium with fluctuations in asset prices. As the set of unrationed households changes over time and states, excess demand functions shift, asset returns fluctuate, and some households are shut out of asset markets. Examples suggest that the amplitude of these movements is negatively correlated with the productivity of the asset and with the penalty for default.     

基于可获供给的资产价格动态

通过引入疏忽投资者,本文初步探讨可获资产供给引起的价格波动,对比经典资产价格理论,结果显示市场积极参与度及入场时机引发的交易廷迟都将导致价格波动,而具有更高流动性的市场,其产品供给更丰富,价格也相对更低。     

Optimal inventories and equilibrium price behavior

This paper departs from the established tradition of equilibrium inventory theory by examining the relationship between inventories and market prices when production is instantaneous but distribution is costly. Inventory holdings are not buffer stocks and do not facilitate production smoothing; rather, production variability exceeds the variability of final sales. Voluntary holdings of marketable finished goods are not restricted to occasional “speculation” during periods of unexpectedly low demand, but may persist even when capital losses are anticipated. In these respects, the paper reconciles important features of the inventory decision problem with the results of modern investment theory.     

Asset market equilibrium with short-selling and differential information

We introduce differential information in the asset market model studied by Cheng J Math Econ 20(1):137–152,1991, Dana and Le Van J Math Econ 25(3):263–280,1996 and Le Van and Truong Xuan J Math Econ 36(3): 241–254, 2001. We prove an equilibrium existence result assuming that the economy’s information structure satisfies the conditional independence property. If private information is not publicly verifiable, agents have incentives to misreport their types and therefore contracts may not be executed in the second period. We also show that under the conditional independence property equilibrium contracts are always executable.