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Relative wealth concerns and financial bubbles
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DeMarzo, Peter, Kaniel, Ron and Kremer, Ilan (2008) Relative wealth concerns and financial bubbles. Review of Financial Studies, Vol.21 (No.1). pp. 19-50. doi:10.1093/rfs/hhm032 ISSN 0893-9454.
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Official URL: http://dx.doi.org/10.1093/rfs/hhm032
Abstract
We present a rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining financial bubbles. We consider a finite-horizon overlapping generations model in which agents care only about their consumption. Though the horizon is finite, competition over future investment opportunities makes agents' utilities dependent on the wealth of their cohort and induces relative wealth concerns. Agents herd into risky securities and drive down their expected return. Even though the bubble is likely to burst and lead to a substantial loss, agents' relative wealth concerns make them afraid to trade against the crowd.
Item Type: | Journal Article | ||||
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Divisions: | Faculty of Social Sciences > Economics | ||||
Journal or Publication Title: | Review of Financial Studies | ||||
Publisher: | Oxford University Press | ||||
ISSN: | 0893-9454 | ||||
Official Date: | January 2008 | ||||
Dates: |
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Volume: | Vol.21 | ||||
Number: | No.1 | ||||
Page Range: | pp. 19-50 | ||||
DOI: | 10.1093/rfs/hhm032 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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