Michael Youssefmir, Bernardo A. Huberman, and Tad Hogg
Dynamics of Computation Group
Xerox Palo Alto Research Center
Palo Alto, CA 94304
hogg@parc.xerox.com
We present a dynamical theory of asset price bubbles that exhibits the
appearance of bubbles and their subsequent crashes. We show that when
speculative trends dominate over fundamental beliefs, bubbles form,
leading to the growth of asset prices away from their fundamental value.
This growth makes the system increasingly susceptible to any exogenous
shock, thus eventually precipitating a crash. We also present computer
experiments which in their aggregate behavior confirm the predictions of
the theory.
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