Title: Psychological Aspects of Market
Crashes
Abstract: This
paper
analyzes the sensitivity of market crashes to investors’ psychology in
a
standard general equilibrium framework with het- erogenous beliefs.
Contrary
to the traditional view that market crashes are driven by large drops
in
aggregate endowments, we show that: 1- the magnitude of the crash is an
increasing
function of the lower bound of individual anticipations about
endowments
drop provided that an- ticipations are significant enough, and 2- no
crash
occurs regardless of the endowments drop when those anticipations are
small.
Author: Patrick
Leoni