A weighted replicator dynamic describes how agents switch between a forecast based on fundamentals, a rational bubble forecast and a re‡ective forecast, a weighted average of the former two. If the innovations to the extraneous martingale have a similar magnitude to those of the dividend process and agents are su¢ ciently aggressive in switching forecasting strategies, a signi…cant portion of t...

In this paper we study an economy with a high degree of financialization in which (nonfinancial) firms need loans from commercial banks to finance production, service debt, and make long-term investments. Along the business cycle, the economy follows a Minsky base cycle with firms traversing through the various stages of financial fragility, i.e. hedge, speculative and Ponzi finance (cf., Minsk...

This paper proves two theorems about economies with a finite number of infinitely lived agents who trade a complete set of one-period Arrow securities and several infinitely lived securities at each date, subject to short-sales constraints. The first theorem in the paper considers an equilibrium to an economy of this kind. It proves that there exists another economy with perturbed short-sales c...

People use to believe that no bubble can exist in an infinite-horizon model with a finite number of rational individuals. However, the opinion is true only for the baseline case. In the baseline model, wealth merely provides consumption flows, which individuals only care about. No one likes to hold an asset, whose price is above its fundamental value, forever. Sooner or later, individuals will ...

As we show using the notion of equilibrium in the theory of infinite sequential games, bubbles and escalations are rational for economic and environmental agents, who believe in an infinite world. This goes against a vision of a self regulating, wise and pacific economy in equilibrium. In other words, in this context, equilibrium is not a synonymous of stability. We attempt to draw from this st...

Monte Carlo evidence [Evans (1991)] indicates that when speculative bubbles are collapsible, the traditional cointegration approach based on unit root tests has some serious drawbacks. We propose in this paper an alternative approach to test such bubbles. We demonstrate that the suggested test has some advantages over the traditional unit root based tests, especially for bubbles that are collap...

Do women and men behave differently in financial asset markets? Our results from an asset market experiment show a marked gender difference in producing speculative price bubbles. Mixed markets show intermediate values, and a meta-analysis of 35 markets from different studies confirms the inverse relationship between the magnitude of price bubbles and the frequency of female traders in the mark...

Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward discount. Properties of the expected forward forecast error are reviewed. Issues such as the relation...