Rational Belief Bubbles

31 Pages Posted: 23 May 2018

See all articles by H. Sohn

H. Sohn

ETH Zürich

Didier Sornette

Risks-X, Southern University of Science and Technology (SUSTech); Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Tokyo Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: May 5, 2018

Abstract

We propose an extension of the class of rational expectations bubbles (REBs) to the more general rational beliefs setting of Kurz (1994a,b). In a potentially non-stationary but stationarizable environment, it is possible to hold more than one (small-r) “rational” expectation. When rational but diverse beliefs converge (“correlated beliefs”), they do not cancel each other out in aggregate anymore. This can make them an object of rational speculation. Diverse but correlated beliefs can thus account for speculative bubbles, without the need for irrational agents or limits to arbitrage. Many of the shortcomings of REBs that make rational bubbles implausible can be overcome once we relax the ergodicity requirement. In particular, we argue that the hitherto unexplained “bubble component” of REBs corresponds to the extension of the state space in Kurz and Motolese (2011).

Keywords: Asset pricing, Bubbles, Efficient markets, Rational expectations, Rational Beliefs, Aggregation, Heterogeneous expectations, Correlated beliefs

JEL Classification: B20, D53, D58, D81, D83, D84, D85, E13, G00

Suggested Citation

Sohn, H. and Sornette, Didier, Rational Belief Bubbles (May 5, 2018). Available at SSRN: https://ssrn.com/abstract=3176871 or http://dx.doi.org/10.2139/ssrn.3176871

H. Sohn (Contact Author)

ETH Zürich ( email )

Zürich, 8092
Switzerland

Didier Sornette

Risks-X, Southern University of Science and Technology (SUSTech) ( email )

1088 Xueyuan Avenue
Shenzhen, Guangdong 518055
China

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Tokyo Institute of Technology ( email )

2-12-1 O-okayama, Meguro-ku
Tokyo 152-8550, 52-8552
Japan

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
179
Abstract Views
1,036
Rank
147,090
PlumX Metrics