Title: A theory of speculative bubbles and crashes

Abstract

The aim of this talk is to propose a new model of bubbles and crashes to elucidate a mechanism of bubbles and subsequent crashes. We consider an asset market in which the risky assets into two classes, the risky asset, and the risk-free asset are traded. Investors are divided into two groups of investors who have the different rationality on decision-making respectively. One is fundamentalists who maximize their expected utility of their wealth in the next period following their rational assessment of the fundamental values of risky assets. Another is speculators who maximize their random utility of binary choice: buying the bubble asset and holding the risk-free asst. The speculator’s behavior is modeled in a framework of the Ising spin model of statistical mechanics, which can be considered as a model of Keynse’s beauty contest metaphor. We demonstrate that (i) if speculators’ conformity effect (the extent that each noise-trader is influenced by the decisions of other speculators) is weak, then the market price converges to the fundamental price, so that the efficient market hypothesis holds, but that (ii) if speculators’ conformity effect is strong, then speculators’ herd behavior gives cause to a bubble, and their positive-feedback trading prolongs bubble, but a bubble is necessarily ended up with a crash. Furthermore, we describe that cycles of bubbles and crashes are repeated.

Biography

Taisei Kaizoji is a Professor of Economics at International Christian University in Tokyo, Japan. He obtained his undergraduate degree in commerce in 1986 from Waseda University and received his Ph.D. in Arts and Sciences from the Tokyo Institute of Technology in 1999. He was also a visiting professor at University of Kiel in Germany in 2000 and a visiting professor at ETH Zurich in 2008. He is the Alexander von Humboldt Fellow since 2001. He is a member of the editorial board for Journal of Economic Interaction and Coordination since 2006. He has published more than 100 papers in scientific journals, and three co-edited books in econophysics, network theory, macroeconomics, and financial engineering. His recent research interests include: (1) speculative bubbles and crashes in financial markets, (2) Macroeconomic tail risks, and (3) the market efficiency of cryptocurrency markets.