Shakeouts and Market Crashes

32 Pages Posted: 4 Jul 2004 Last revised: 7 May 2021

See all articles by Alessandro Teresio Barbarino

Alessandro Teresio Barbarino

University of Chicago - Department of Economics

Boyan Jovanovic

New York University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: June 2004

Abstract

Stock-market crashes tend to follow run-ups in prices. These episodes look like bubbles that gradually inflate and then suddenly burst. We show that such bubbles can form in a Zeira-Rob type of model in which demand size is uncertain. Two conditions are sufficient for this to happen: A declining hazard rate in the prior distribution over market size and a positively sloped supply of capital to the industry. For the period 1971-2001 we fit the model to the Telecom sector.

Suggested Citation

Barbarino, Alessandro Teresio and Jovanovic, Boyan, Shakeouts and Market Crashes (June 2004). NBER Working Paper No. w10556, Available at SSRN: https://ssrn.com/abstract=557189

Alessandro Teresio Barbarino

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Boyan Jovanovic (Contact Author)

New York University - Department of Economics ( email )

19 w 4 st.
New York, NY 10012
United States

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