Abstract
Usually financial crises go along with bubbles in asset prices, such as the housing bubble in the US in 2007. This paper attempts to build a mathematical model of financial bubbles from an econophysics, and thus a new perspective. I find that agents identify bubbles only with a time delay. Furthermore, I demonstrate that the detection of bubbles is different on either the individual or collective point of view. Second, I utilize the findings for a new definition of asset bubbles in finance. Finally, I extend the model to the study of asset price dynamics with news. In conclusion, the model provides unique insights into the properties and developments of financial bubbles.
Highlights
The phenomenon of a financial bubble is debated in economics for centuries
There are several important questions: What is a bubble? How can we identify a bubble? What is the root cause of a bubble and what triggers a bubble burst? So far, different economic and mathematical models study different issues of bubbles
I translate this idea into the dynamics of financial assets without relying on stochastic and martingale theory [1]
Summary
The phenomenon of a financial bubble is debated in economics for centuries. Different economic and mathematical models study different issues of bubbles. The complexity in financial markets due to social interaction and behavioural elements makes the study of those bubbles difficult. This paper attempts to develop a new model of financial bubbles. I translate this idea into the dynamics of financial assets without relying on stochastic and martingale theory [1]. I intend to throw light on the bubble definition, detection, and dynamics without using stochastic theory. It turns out that the modeling of herd behaviour and the impact of news are major forces of financial bubbles. I analyze news of asset prices and the relationship to financial bubbles. (2015) An Econophysics Model of Financial Bubbles.
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