A Deterministic Description of Irrational and Semi-Rational Bubbles in Asset Markets

This present work provides a deterministic description irrational and semi-rational bubbles based on the stylized description forwarded by Hyman Minsky (1972), Day and Huang (1990) respectively. The paper emphasizes on two areas: First, it proposes a mathematical representation of an irrational bubble using piece-wise linear maps in a discrete time frame. Second, it studies the chaotic signals generated by them to explain the instability in asset price bubbles and explains the factors which impact their longevity.

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INEFFICIENT BUBBLES AND EFFICIENT DRAWDOWNS IN FINANCIAL MARKETS

International Journal of Theoretical and Applied Finance ◽

10.1142/s0219024920500478 ◽

2020 ◽

Vol 23 (07) ◽

pp. 2050047 ◽

Cited By ~ 1

Author(s):

MICHAEL SCHATZ ◽

DIDIER SORNETTE

Keyword(s):

Rational Expectations ◽

Rational Expectation ◽

Asset Price ◽

Theoretical Background ◽

Local Martingale ◽

Management Problem ◽

Market Failures ◽

Asset Price Bubbles ◽

Price Bubbles ◽

Hyman Minsky

At odds with the common “rational expectations” framework for bubbles, economists like Hyman Minsky, Charles Kindleberger and Robert Shiller have documented that irrational behavior, ambiguous information or certain limits to arbitrage are essential drivers for bubble phenomena and financial crises. Following this understanding that asset price bubbles are generated by market failures, we present a framework for explosive semimartingales that is based on the antagonistic combination of (i) an excessive, unstable pre-crash process and (ii) a drawdown starting at some random time. This unifying framework allows one to accommodate and compare many discrete and continuous time bubble models in the literature that feature such market inefficiencies. Moreover, it significantly extends the range of feasible asset price processes during times of financial speculation and frenzy and provides a strong theoretical background for future model design in financial and risk management problem settings. This conception of bubbles also allows us to elucidate the status of rational expectation bubbles, which, by design, suffer from the paradox that a rational market should not allow for misvaluation. While the discrete time case has been extensively discussed in the literature and is most criticized for its failure to comply with rational expectations equilibria, we argue that this carries over to the finite time “strict local martingale”-approach to bubbles.

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Asset bubbles in explaining top income shares

The Journal of Economic Inequality ◽

10.1007/s10888-021-09481-y ◽

2021 ◽

Author(s):

Saikat Sarkar ◽

Matti Tuomala

Keyword(s):

Housing Market ◽

Asset Price ◽

Capital Gains ◽

Asset Markets ◽

Tax Rates ◽

Monetary Policies ◽

Asset Price Bubbles ◽

Asset Bubbles ◽

Price Bubbles ◽

Top Income Shares

AbstractThis paper considers the role of asset price bubbles (crashes) as an important determinant in seeking a further explanation for top income shares. The asset price bubbles caused at least in part by monetary policies, along with other determinants such as top tax rates and innovativeness are the important drivers to explain the surge in top income shares. The empirical results show that correlation between asset bubbles and top inequality is positive and significant. The regression coefficient of stock and housing market bubbles have a positive effect on top income shares, while the stock and housing market crashes fail to reduce the surge in top income shares. In sum, as the asset markets grow, the share of income going to those at the very top increases and the accumulation of income accelerates if the duration of bubbles expands. Concentration of income at the very top is much more important when capital gains are counted as income.

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Bubbles, Busts, and Blame

10.31228/osf.io/djqvy ◽

2018 ◽

Author(s):

Robert C. Hockett

Keyword(s):

Collective Action ◽

Asset Price ◽

Capital Gains ◽

Asset Markets ◽

Continuous Series ◽

Asset Price Bubbles ◽

Price Bubbles ◽

Knowing That ◽

Present Context ◽

Collective Agent

37 Cornell Law Forum 14 (2011)I argue that financial asset price bubbles and busts, such as those we have recently experienced in the mortgage and securities markets, are compatible with market efficiency, individual rationality, and even ethically unobjectionable behavior. The reason is that they constitute classic recursively self-amplifying collective action problems, the hallmark of which is the efficient aggregation of individually rational behaviors into collectively calamitous outcomes. In the present case, individuals rationally "legged the spread" between cheap borrowing costs and credit-fueled capital gains rates, neither of which market actors could affect in their individual capacities even when knowing that credit would have eventually to run out at some indefinite point in future. The upshot was a continuous series of self-reinforcing credit-fueled asset price rises, followed by a symmetrical series of hoarding-induced asset price drops once credit was exhausted. It is important to emphasize the rationality- and efficiency-compatability side of this story because prescribing a proper cure to our ills presupposes a proper diagnosis. The solution to a collective action problem, of course, is a collective agent. In the present context, that is a macroprudential financial regulator cognizant of her requisite role in tightening credit-money supplies when positive feedback loops emerge in asset markets.

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