Bubbles and crashes

Dilip Abreu, Markus K. Brunnermeir

    Research output: Contribution to journalArticlepeer-review


    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.

    Original languageEnglish (US)
    Pages (from-to)173-204
    Number of pages32
    Issue number1
    StatePublished - 2003


    • Behavioral finance
    • Bubbles
    • Crashes
    • Limits to arbitrage
    • Market timing
    • Overreaction
    • Synchronization
    • Temporal coordination

    ASJC Scopus subject areas

    • Economics and Econometrics


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