Shakeouts and Market Crashes

Alessandro Barbarino, Boyan Jovanovic

NBER Working Paper No. 10556
Issued in June 2004
NBER Program(s):Asset Pricing Program, Economic Fluctuations and Growth Program

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.

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Document Object Identifier (DOI): 10.3386/w10556

Published: Alessandro Barbarino & Boyan Jovanovic, 2007. "Shakeouts And Market Crashes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 385-420, 05. citation courtesy of

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