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Informational Efficiency and Endogenous Rational Bubbles

  • George A. Waters
Chapter
Part of the Dynamic Modeling and Econometrics in Economics and Finance book series (DMEF, volume 24)

Abstract

In a model where rational bubbles form and collapse endogenously, properly specified tests of return predictability have little power to reject deviations from the efficient markets model. A weighted replicator dynamic describes how agents switch between a forecast based on fundamentals, a rational bubble forecast, and a weighted average of the two. A significant portion of the population may adopt the rational bubble forecast, which is inconsistent with the efficient markets model but satisfies informational efficiency. Tests on simulated data show excess variance in the price and unpredictable returns.

JEL Classification

C22 C73 G12 D84 

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Copyright information

© Springer Nature Switzerland AG 2018

Authors and Affiliations

  • George A. Waters
    • 1
  1. 1.Department of EconomicsIllinois State UniversityNormalUSA

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