Markus Brunnermaier

Bubbles are typically associated with dramatic asset price increases followed by a collapse. Bubbles arise if the price exceeds the asset’s fundamental value. This can occur if investors hold the asset because they believe that they can sell it at a higher price to some other investor even though the asset’s price exceeds its fundamental value.
Since asset prices affect the real allocation of an economy, it is important to understand the circumstances under which these prices can deviate from their fundamental value.
There are four main strands of models:

  1. all investors have rational expectations and identical information,
  2. investors are asymmetrically informed and bubbles can emerge because their existence need not be commonly known,
  3. rational traders interact with behavioural traders and bubbles persist since limits to arbitrage prevent rational investors from eradicating the price impact of behavioural traders,
  4. investors hold heterogeneous beliefs, potentially due to psychological biases, and agree to disagree about the fundamental value.

3 thoughts on “Markus Brunnermaier

  1. shinichi Post author

    Rational bubbles under symmetric information
    Rational bubbles under symmetric information are studied in settings in which all agents have rational expectations and share the same information.

    Asymmetric information bubbles
    Asymmetric information bubbles can occur in a setting in which investors have different information, but still share a common prior distribution.
    In contrast to the symmetric information case, the presence of a bubble need not be commonly known. For example, it might be the case that everybody knows the price exceeds the value of any possible dividend stream, but it is not the case that everybody knows that all the other investors also know this fact. It is this lack of higher-order mutual knowledge that makes it possible for finite bubbles to exist under certain necessary conditions.

    Bubbles due to limited arbitrage
    Bubbles due to limited arbitrage arise in models in which rational, well-informed and sophisticated investors interact with behavioural market participants whose trading motives are influenced by psychological biases.

    Heterogeneous beliefs bubbles
    Bubbles can also emerge when investors have heterogeneous beliefs and face short-sale constraints. Investors’ beliefs are heterogeneous if they start with different prior belief distributions that can be due to psychological biases.

  2. shinichi Post author










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