Speculation, Trading, and Bubbles

Speculation, Trading, and Bubbles

JOSÉ A. SCHEINKMAN
KENNETH J. ARROW
PATRICK BOLTON
SANFORD J. GROSSMAN
JOSEPH E. STIGLITZ
Copyright Date: 2014
Pages: 128
https://www.jstor.org/stable/10.7312/sche15902
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  • Book Info
    Speculation, Trading, and Bubbles
    Book Description:

    The history of financial markets is full of moments in which asset prices inflate far beyond their intrinsic value. These events are commonly called bubbles, and in this book, José A. Scheinkman and other top economists offer new explanations for this phenomenon.

    Scheinkman discusses some stylized facts concerning bubbles, such as high trading volume and the coincidence between bubbles' implosion and increases in supply, and he develops a model for bubbles based on differences in beliefs among investors that explains these observations. Sandy Grossman and Patrick Bolton offer commentaries on Scheinkman's work, investigating factors that contribute to bubbles, such as excessive leverage, overconfidence, mania, and panic in speculative markets. Kenneth J. Arrow and Joseph E. Stiglitz add introductory material contextualizing Scheinkman's findings.

    eISBN: 978-0-231-53763-6
    Subjects: Business, Finance, Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. FOREWORD
    (pp. vii-x)
    KENNETH J. ARROW

    I want to briefly express my gratitude for the existence of this series of lectures in my honor and to mark briefly the continuities and discontinuities in economics at Columbia.

    Columbia was a very chaotic place when I was here. The departments were teaching different courses that had very little relation to each other. I came in really to study statistics, not to study economics. There was no degree in statistics, so I took my Ph.D. in economics simply as the only way of getting close to it. I got hooked. My mentor was somebody whose influence is still felt...

  4. ACKNOWLEDGMENTS
    (pp. xi-xiv)
    Joseph E. Stiglitz
  5. INTRODUCTION
    (pp. 1-6)
    JOSEPH E. STIGLITZ

    Kenneth Arrow is one of Columbia’s most distinguished graduates, whose accomplishments I hope all our graduate students seek to emulate. In this series, we have organized an annual lecture each around one of his papers or contributions. The lectures and subsequent discussions highlight the ideas that have been developed in subsequent decades elaborating on his original thoughts.

    The first lecture, by Bruce Greenwald and me (with Philippe Aghion, Robert Solow, and Kenneth Arrow as discussants) was based on a paper Ken wrote in 1962 on learning by doing, which has been one of the most innovative papers in the theory...

  6. SPECULATION, TRADING, AND BUBBLES
    (pp. 7-62)
    JOSÉ A. SCHEINKMAN

    The history of financial markets is strewn with periods in which asset prices seem to vastly exceed fundamentals—events commonly called bubbles. Nonetheless, there is very little agreement among economists on the economic forces that generate such occurrences. Numerous academic papers and books have been written explaining why the prices attained in a particular episode can be justified by economic actors rationally discounting future streams of payoffs. Some proponents of the efficient-markets theory even deny that one can attach any meaning to bubbles.¹

    Part of the difficulty stems from the fact that economists’ discussions of bubbles often concentrate solely on...

  7. COMMENTARY
    (pp. 63-72)
    PATRICK BOLTON

    Let me begin by saying that it is a great honor for me to be commenting on José Scheinkman’s paper. José is a friend and a co-author. I have the absolute highest respect and admiration for his research and the work that he presents here. It was also a truly special honor sharing this opportunity to write on stock market bubbles and financial crises with three giants of economic theory.

    José’s exploration of the economic foundations of stock market bubbles is quite a tour de force. He has already referred to contributions by Ken, Joe, and Sanford, and I will...

  8. COMMENTARY
    (pp. 73-80)
    SANFORD J. GROSSMAN

    I first met José Scheinkman when I was a teenager in graduate school. I met Joseph Stiglitz soon after and then Kenneth Arrow. They were all very important influences in my life, so it gives me great pleasure to be around them again.

    The topic of this book reminds me of the Supreme Court justice, Potter Stewart, who said something along the lines of: I cannot really define what I understand to be pornography, but I know it when I see it. Bubbles to me are a little bit like that. Again, sometimes you see a movie and the issue...

  9. COMMENTARY
    (pp. 81-88)
    KENNETH J. ARROW

    I have been concerned about one aspect of the efficiency of general equilibrium: the distribution of risks and the idea of rational individual behavior in that context. Rational theory is a limited theory, as Patrick Bolton has said. One of my questions is what that rational theory means. Does it in fact exist? For various reasons, I now think that the concept of Arrow-Debreu securities, though technically correct within its formulation, is misleading. In it, you seek to insure yourself against all contingencies, and the securities observed in the market form a complicated way of meeting this need. The value...

  10. DISCUSSION
    (pp. 89-100)

    Following the presentation of the lecture and the commentaries, audience members were given the opportunity to ask questions. Below is the resulting discussion.

    AUDIENCE MEMBER: From the point of view of your theory, bubbles collapse when more of the asset is supplied, but it is not obvious why that would occur suddenly. You would think there would be a constant incentive or maybe a constantly increasing incentive as the bubble grows, but why would it be abrupt? Is there an interpretation in terms of your theory of why the option value would suddenly disappear or something similar?

    JOSÉ A. SCHEINKMAN:...

  11. NOTES
    (pp. 101-104)
  12. REFERENCES
    (pp. 105-110)
  13. NOTES ON CONTRIBUTORS
    (pp. 111-114)
  14. INDEX
    (pp. 115-122)