Working Paper: NBER ID: w10556
Authors: Alessandro Barbarino; Boyan Jovanovic
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 positively sloped supply of capital to the industry. For the period 1971-2001 we fit the model to the Telecom sector.
Keywords: Market Crashes; Bubbles; Telecom Sector
JEL Codes: G0; L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| declining hazard rate in the prior distribution over market size (D39) | rising optimism about market growth (F01) |
| positively sloped supply of capital (E22) | rising optimism about market growth (F01) |
| rising optimism about market growth (F01) | increased risk of a crash (R48) |
| capacity creation overshooting demand (E22) | stock market crash (G01) |
| optimism about future market growth (F01) | inflated stock prices (E31) |
| inflated stock prices (E31) | market downturn (G10) |