Citation

Discussion Paper Details

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Title: Informational Overshooting, Booms and Crashes

Author(s): Joseph Zeira

Publication Date: September 1993

Keyword(s): Asset Markets, Booms, Crashes, Information and Rational Expectations

Programme Area(s): International Macroeconomics

Abstract: This paper offers an informational explanation for asset price booms and crashes. If market fundamentals change, but the length of this process of change is unknown, market participants try to learn about it by observing market outcomes. This learning generates a boom and a crash, which we call `informational overshooting'. The paper applies this idea to real-estate markets, to exchange markets and to stock markets. It shows that entry of a new group of investors to a stock market can generate such a boom and a crash. One implication of this result is that financial liberalizations tend to be followed by stock market booms and crashes.

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Bibliographic Reference

Zeira, J. 1993. 'Informational Overshooting, Booms and Crashes'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=823