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Bubbles and Market Crashes

Michael Youssefmir·Bernardo Huberman·Tad Hogg
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Abstract

We present a dynamical theory of asset price bubbles that exhibits the appearance of bubbles and their subsequent crashes. We show that when speculative trends dominate over fundamental beliefs, bubbles form, leading to the growth of asset prices away from their fundamental value. This growth makes the system increasingly susceptible to any exogenous shock, thus eventually precipitating a crash. We also present computer experiments which in their aggregate behavior confirm the predictions of the theory.

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Michael Youssefmir, Bernardo Huberman, Tad Hogg. 1994-09-02. Bubbles and Market Crashes. https://arxiv.org/abs/adap-org/9409001

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