Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/142542
Authors: 
Fry, John M.
Year of Publication: 
2009
Series/Report no.: 
EERI Research Paper Series 10/2009
Abstract: 
We develop a rational expectations model of financial bubbles and study ways in which a generic risk-return interplay is incorporated into prices. We retain the interpretation of the leading Johansen-Ledoit-Sornette model, namely, that the price must rise prior to a crash in order to compensate a representative investor for the level of risk. This is accompanied, in our stochastic model, by an illusion of certainty as described by a decreasing volatility function. The basic model is then extended to incorporate multivariate bubbles and contagion, non-Gaussian models and models based on stochastic volatility. Only in a stochastic volatility model where the mean of the log-returns is considered fixed does volatility increase prior to a crash.
Subjects: 
Financial crashes
super-exponential growth
illusion of certainty
contagion
housing-bubble
JEL: 
C00
E30
G10
Document Type: 
Working Paper

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