Shakeouts and Market Crashes

Barbarino, Alessandro; Jovanovic, Boyan

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Shakeouts and Market Crashes

NYU Working Paper No. S-MF-03-15

30 Pages Posted: 12 Nov 2008

See all articles by Alessandro Barbarino

Alessandro Barbarino

Board of Governors of the Federal Reserve System

Boyan Jovanovic

New York University - Department of Economics

There are 2 versions of this paper

Date Written: September 2003

Abstract

Stock-market crashes tend to follow run-ups in prices. These episodes look like bubbles that gradually inflate and then suddenly burst. We show that such bubbles can form in a Zeira-Rob type of model in which demand size is uncertain. Two conditions are sufficient for this to happen: A declining hazard rate in the prior distribution over market size and a convex cost of investment. For the period 1971-2001 we fit the model to the Telecom sector.

Suggested Citation: Suggested Citation

Barbarino, Alessandro and Jovanovic, Boyan, Shakeouts and Market Crashes (September 2003). NYU Working Paper No. S-MF-03-15, Available at SSRN: https://ssrn.com/abstract=1300218