TY - JOUR
T1 - Shakeouts and market crashes
AU - Barbarino, Alessandro
AU - Jovanovic, Boyan
PY - 2007/5
Y1 - 2007/5
N2 - This article provides a microfoundation for the rise in optimism that seems to precede market crashes. Small, young markets are more likely to experience stock-price run-ups and crashes. We use a Zeira-Rob type of model in which demand size is uncertain. Optimism then grows rationally if traders' prior distribution over market size has a decreasing hazard. Such prior beliefs are appropriate if most new markets are duds and only a few reach a large size. The crash occurs when capacity outstrips demand. As an illustration, for the period 1971-2001 we fit the model to the Telecom sector.
AB - This article provides a microfoundation for the rise in optimism that seems to precede market crashes. Small, young markets are more likely to experience stock-price run-ups and crashes. We use a Zeira-Rob type of model in which demand size is uncertain. Optimism then grows rationally if traders' prior distribution over market size has a decreasing hazard. Such prior beliefs are appropriate if most new markets are duds and only a few reach a large size. The crash occurs when capacity outstrips demand. As an illustration, for the period 1971-2001 we fit the model to the Telecom sector.
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U2 - 10.1111/j.1468-2354.2007.00432.x
DO - 10.1111/j.1468-2354.2007.00432.x
M3 - Article
AN - SCOPUS:34147178515
VL - 48
SP - 385
EP - 420
JO - International Economic Review
JF - International Economic Review
SN - 0020-6598
IS - 2
ER -