Lecture 10 Speculative Bubbles Flashcards
1
Q
Is the market inefficient?
A
Yes
2
Q
What is the fundamental principle of optimal forecasting?
A
Forecasts do not vary more than the forecasted variable
3
Q
What are three behavioral explanations of the volatility puzzle?
A
- Minsky: financial instability hypothesis
- Barberis, Huang and Santos: house money effect
- Belief in the law of small numbers (hot hand fallacy)
4
Q
Does all this mean that the market is predictable?
A
Yes, but for longer time horizons. You cannot expect to see solid returns over short time intervals. Market efficiency is a half-truth
5
Q
Why is Talk an important idicator of a bubble?
A
Since word-of-mouth transmission of the excitement is a hallmark
