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2009/05/22

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Editor-in-Chief: Carlos Gershenson
Founding Editor: Gottfried Mayer

Bubbles and crashes: Gradient dynamics in financial markets, Journal of Economic
Dynamics and Control
 









Fund managers respond to the payoff gradient by continuously adjusting leverage
in our analytic and simulation models. The base model has a stable equilibrium
with classic properties. However, bubbles and crashes occur in extended models
incorporating an endogenous market risk premium based on investors' historical
losses and constant-gain learning. When losses have been small for a long time,
asset prices inflate as fund managers increase leverage. Then slight losses can
trigger a crash, as a widening risk premium accelerates deleveraging and asset
price declines.
Source: Bubbles and crashes: Gradient dynamics in financial markets[
http://dx.doi.org/10.1016/j.jedc.2008.10.006 ], Friedman, Daniel Abraham, Ralph,
DOI: 10.1016/j.jedc.2008.10.006, Journal of Economic Dynamics and Control, vol.
33, issue 4, pages 922-937, 2009/05/01
Contributed by Anton Joha - antonjohagmail.com

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