On the Inception of Financial Representative Bubbles
Abstract
:1. Introduction
2. The Inception and the Representativeness
2.1. The Rational Case
2.2. A Brief Digression: The Representativeness
Diagnostic Expectations
2.3. The Representative Case
2.3.1. Diagnostic Expectations: Extrapolation and Neglect
- (i)
- the first term on the right-hand side is:
- (ii)
- as for the second term, assume normal densities and an autoregressive model of order one, AR (1) for , rewriting (13) in these terms, then:
2.3.2. The Representative Bubble
2.3.3. When Does It Start?
3. Conclusions
- -
- From Proposition 1, a representative bubble can start at any time due to displacements that follow from extrapolative expectations and neglect of tail risks. In short, from diagnostic expectations;
- -
- As rational bubbles, the representative dynamics cannot be negative due to the free disposal;
- -
- Following Proposition 1, representative bubbles can arise, burst at zero and then grow again in the same asset;
- -
- A representative bubble is not dependent on the failure of the transversality condition; hence, it can be persistent and distorted.
Author Contributions
Conflicts of Interest
References
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Ferrara, M.; Pansera, B.A.; Strati, F. On the Inception of Financial Representative Bubbles. Mathematics 2017, 5, 64. https://doi.org/10.3390/math5040064
Ferrara M, Pansera BA, Strati F. On the Inception of Financial Representative Bubbles. Mathematics. 2017; 5(4):64. https://doi.org/10.3390/math5040064
Chicago/Turabian StyleFerrara, Massimiliano, Bruno A. Pansera, and Francesco Strati. 2017. "On the Inception of Financial Representative Bubbles" Mathematics 5, no. 4: 64. https://doi.org/10.3390/math5040064
APA StyleFerrara, M., Pansera, B. A., & Strati, F. (2017). On the Inception of Financial Representative Bubbles. Mathematics, 5(4), 64. https://doi.org/10.3390/math5040064