Business and Economics Journal

Bubbles and Overshooting Crash

Abstract

Li Dai, Peng Zhou

This paper reviews a model of bubbles under the assumption of heterogeneous rational traders. In the presence of dispersion of opinions, or sequential awareness, financial bubbles are justified by the interactions between rational arbitrageurs and behavioural traders. Timing is a very important component in the trader's strategy. This model is then extended to explain both bubbles and overshooting crash.