Conference Paper

Informational overshooting, booms and crashes

Abstract: This paper offers an informational explanation to stock markets' booms and crashes. This explanation builds on the idea of 'informational overshooting': if market fundamentals change for an unknown period of time, prices experience a boom, which ends in a crash, due to informational dynamics. The paper then shows that 'informational overshooting' occurs when the market expands to a new capacity, which is unknown until it is reached. The paper presents two examples for such expansions, one due to increased productivity and one due to entry of new investors to the stock market. One implication is that financial liberalizations tend to be followed by booms and crashes.

Keywords: Stock market;

Status: Published in Irrational exuberance? : a conference (2000: April 21) ; Journal of Monetary Economics, February 1999, v. 43, iss. 1, pp. 237-57>

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Proceedings

Publication Date: 2000

Issue: Apr