Hye-Jin Cho, On Overconfidence, Bubbles and the Stochastic Discount Factor

Wednesday, 09/05/2018
Scuola Normale Superiore
Aula Bianchi Scienze

Hye-Jin Cho
University of Paris 1 – Panthéon Sorbonne


This study is intended to provide a continuous-time equilibrium model
in which overconfidence generates disagreements among two groups
regarding asset fundamentals. Every agent in trading wants to sell
more than the average stock price in the market. However, the
overconfident agent drives a speculative bubble with a false belief
that the stock price will tend to move to the average price over time.
I represent the difference between a false belief and a stochastic
stationary process which does not change when shifted in time. The gap
of beliefs shows how to accommodate dynamic fluctuations as parameters
change such as the degree of overconfidence or the information of
signals. By showing how changes in an expectation operator affect the
stochastic variance of economic fundamentals, speculative bubbles are
revealed at the burst independently from the market.