"Effects of Reputation in Bubbles and Crashes"
We analyze the stock market by modeling it as a timing game among arbitrageurs for beating the gun. We assume that (1) arbitrageurs are behavioral with a small probability, (2) the bubble soft-lands, and (3) the postcrash price increases as the X-day is postponed. Due to these assumptions, the effect of reputation assumes importance because any rational arbitrageur is willing to build a reputation in order to ride the bubble. It is demonstrated that the bubble persists for a long period as an outcome of a unique symmetric Nash equilibrium, even if all arbitrageurs are almost certainly rational.
Year of publication: |
2008-04
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Authors: | Matsushima, Hitoshi |
Institutions: | Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics |
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