Economic Theory Seminar Series: Speculative Bubbles, Heterogeneous Beliefs and Learning

Jan Werner | University of Minnesota

Speculative bubble arises when the price of an asset exceeds every trader’s valuation measured by her willingness to pay if obliged to hold the asset forever. Speculative bubble indicates speculative trade - whoever holds the asset intends to sell it at a later date. We identify a sufficient condition for speculative bubbles in a market with heterogeneous beliefs and short-sales restrictions. With Bayesian learning and heterogeneous priors, the sufficient condition is that no single prior dominates other agents’ priors in the sense of monotone likelihood ratio order. We study asymptotic properties of speculative bubbles in light of merging of traders’ beliefs.