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Title:Bubbles and crashes: Gradient dynamics in financial markets PDF Logo
Authors:Friedman, Daniel
Abraham, Ralph
Issue Date:2009
Series/Report no.:Working Papers, UC Santa Cruz Economics Department 659
Abstract: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 constantgain 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.
Subjects:Bubbles
Escape dynamics
Time varying risk premium
Constant-gain learning
Agent-based models
JEL:C63
C73
D53
Document Type:Working Paper
Appears in Collections:Working Papers, Economics Department, UC Santa Cruz

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