Multi-Asset Bubbles Equilibrium Price Dynamics

TL;DR

This paper theoretically investigates the formation of asset price bubbles and crashes in a two-asset equilibrium model, revealing conditions for bubble dynamics and the impact of fundamental values on market behavior.

Contribution

It introduces a theoretical framework for understanding multi-asset bubble dynamics, deriving conditions for equilibrium prices based on agent strategies and fundamental values.

Findings

Assets with positive average dividends show hump-shaped bubbles.

Misvaluation occurs in assets with constant fundamental value due to other asset bubbles.

Equilibrium conditions depend on agent strategies and fundamental value trajectories.

Abstract

The price-bubble and crash process formation is theoretically investigated in a two-asset equilibrium model. Sufficient and necessary conditions are derived for the existence of average equilibrium price dynamics of different agent-based models, where agents are distinguished in terms of factor and investment trading strategies. In line with experimental results, we show that assets with a positive average dividend, i.e., with a strictly declining fundamental value, display at the equilibrium price the typical hump-shaped bubble observed in experimental asset markets. Moreover, a misvaluation effect is observed in the asset with a constant fundamental value, triggered by the other asset that displays the price bubble shape when a sharp price decline is exhibited at the end of the market.