A Model of Bubbles and Crashes

Part of the India Studies in Business and Economics book series (ISBE)


This paper presents a model in which an asset bubble may persist despite the presence of a large mass of rational arbitrageurs whose joint responses would suffice to burst the bubble. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This synchronization problem together with the individual incentive to time the market results in the persistence of bubbles over a substantial period. The analysis suggests that behavioral influences on prices are immune to arbitrage in the short and medium run. The model provides a natural setting in which news events, by enabling synchronization, may have a disproportionate impact relative to their intrinsic informational content.


Asset Price Efficient Market Hypothesis Eventual Collapse Bubble Burst Pareto Optimal Allocation 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Abreu D, Brunnermeier MK (2002) Synchronization risk and delayed arbitrage. J Financ Econ 66:341–360CrossRefGoogle Scholar
  2. Abreu D, Brunnermeier MK (2003) Bubbles and crashes. Econometrica 71:173–204CrossRefGoogle Scholar
  3. Keynes JM (1936) The general theory of employment, interest and money. Macmillan, LondonGoogle Scholar
  4. Milgrom PR, Stokey N (1982) Information, trade and common knowledge. J Econ Theory 26:17–27CrossRefGoogle Scholar
  5. New York Times, April 29, 2000: Another Technology Victim; Top Soros Fund Manager Says He ‘Overplayed’ HandGoogle Scholar
  6. Tirole J (1982) On the possibility of speculation under rational expectations. Econometrica 50:1163–1182CrossRefGoogle Scholar

Copyright information

© Springer India 2016

Authors and Affiliations

  1. 1.Princeton UniversityPrincetonUSA

Personalised recommendations