Abstract not found

At the dawn of the 21st century, property and equity ownership are spread more broadly across the population than they once were. One consequence of this is that asset price booms and crashes now have a direct impact on general welfare. The fact that bubbles distort nearly all economic decisions gives policymakers a stronger interest in asset price stability. In this article I examine the theoretical and empirical case for the existence of equity and property bubbles, and then summarise the economic distortions that they create. The evidence suggests increasing our attention to property prices. I go on to discuss the possible policy responses, including examining the consequences of changing the way in which housing is included in standard aggregate price measures.

Abstract not found

We propose to study market efficiency from a computational viewpoint. Borrowing from theoretical computer science, we define a market to be efficient with respect to resources S (e.g., time, memory) if no strategy using resources S can make a profit. As a first step, we consider memory-m strategies whose action at time t depends only on the m previous observations at times t − m,..., t − 1. We introduce and study a simple model of market evolution, where strategies impact the market by their decision to buy or sell. We show that the effect of optimal strategies using memory m can lead to “market conditions ” that were not present initially, such as (1) market bubbles and (2) the possibility for a strategy using memory m ′> m to make a bigger profit than was initially possible. We suggest ours as a framework to rationalize the technological arms race of quantitative trading firms. Keywords: Market Efficiency; Computational Complexity. 1

A decade (and a global financial crisis) after blinder the interaction between researchers and policy-makers in central banks

An (A) expected (strong) bubble is said to exist if it is mutual knowledge that the price of the asset is higher than the expected (possible) dividend. By requiring common knowledge instead of mutual knowledge, the new concept of common expected bubble (common strong bubble) is developed. In a simple …nite horizon model with asymmetric information and short sale constraints, which follows Allen, Morris and Postlewaite (1993), it is showed that two results hold true for any …nite number of agents: First, common strong bubbles never exist in any rational expectations equilibrium; Second, it is possible to have a bubble, which is both a strong bubble and a common expected bubble, in a rational expectations equilibrium, even with common knowledge of trades. Furthermore, the …rst result crucially depends on the implicit assumption of perfect memory, hence an example of common strong bubbles can be constructed in case that agents are forgetful. Based on these results, this paper, as well as Conlon (2004), provides a partial answer to what properties rational bubbles can have and cannot have in a rational expectations equilibrium.

Policy towards speculative bubbles is examined in a model of a Þnite horizon “greater fool ” bubble, with rational agents, asymmetric information and short-sales constraints. This model permits the use of standard tools of comparative dynamics and welfare economics to analyze bubble policies. Government policy is modeled as deßating overpriced assets by revealing information about this overpricing. We assume in this paper that the central bank only deßates assets if they are, in fact, overpriced. However, the central bank is never the only one to know that assets are overpriced. In this environment, a policy rule of deßating overpriced assets also inßuences expectations in states of the world where the central bank does nothing. That is, if the central bank is following a bubble-bursting rule, then the market interprets inaction as an implicit endorsement of asset prices, which raises these prices. This can reduce the lemons problem caused by asymmetric information, if prices rise because the policy protects uninformed buyers from “bad sellers ” who know assets are overpriced. However, if the central bank only deßates “strong bubbles, ” where all investors already know the asset is overpriced, then inaction raises prices because bad sellers become more conÞdent, and this tends to make the lemons problem worse. * The paper beneÞtted greatly from discussions with Franklin Allen, Mike Belongia,

I develop a two market agent-based model to study how global portfolio managers affect global financial crises and stability. The Markowitz model is extended by incorporating several insights from behavioral finance. Simulation results of an agent-based version of the Markowitz model reveal that global financial crises do not occur when global managers are added to the model. However, when risk is determined based on investors ’ historical losses and exponential averaging, slight global manager losses can trigger a widening of both markets ’ risk premium, accelerating the decline in asset prices worldwide. Statistical analysis reveals that global managers are a stabilizing force in smaller numbers; however, they become destabilizing in larger numbers. The ability to reduce risk by diversifying across markets results in excessive risk taking. If global managers exist in larger numbers, systematic over leverage may result such that a deleveraging process can lead to the spreading of financial crises. Other results indicate the existence of contagion and the importance of the real linkage versus the global manager linkage depends on the amount of total assets global managers control in each market. ∗I am grateful Dan Friedman for invaluable advice. I retain sole responsibility for remaining idiosyncrasies and errors.

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