Shakeouts and market crashes

Alessandro Barbarino, Boyan Jovanovic

    Research output: Contribution to journalArticlepeer-review

    Abstract

    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.

    Original languageEnglish (US)
    Pages (from-to)385-420
    Number of pages36
    JournalInternational Economic Review
    Volume48
    Issue number2
    DOIs
    StatePublished - May 2007

    ASJC Scopus subject areas

    • Economics and Econometrics

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