If this early summer is getting your fuses blowing, refresh your mind with the next WISE seminar!
On Wednesday June 1 at 12.45-14 pm in room E, Francesco Pesci will present his work on "A Speculative Bubble in an Intermediated Financial Market".
Here is an abstract of his presentation.
ABSTRACT
In a financial market in which trade is intermediated by specialized “market makers”, differences in expectations (or valuations) about the cash flow from an asset can push its price above its fundamental value, i.e., above what the agents, who are active in the market, would pay if they were forced to hold the asset until maturity.
We present a game-theoretic model, in which the possibility to realize capital gains by selling the asset to more optimistic traders can make the intermediaries be willing to pay a premium over what they think to be the fundamental.
Since the owners of the asset share the same expectations of the market makers, in the (pure-strategy) Nash equilibrium of the game trade between those agents takes place at price higher than what both the owners and the market makers hold to be the fundamental, i.e., the equilibrium exhibits a bubble.
While in the models on bubbles featuring agents with heterogeneous expectations, the demand of less optimistic agents tends to have a “stabilizing” effect on prices, which are bid up by the demand of more optimistic traders, in our model the price of the asset is driven up precisely by less optimistic agent, i.e., the market makers, who buy for speculative purposes.
Allowing for some modifications, our model could also offer an interpretation for events leading to the 2007 “financial crisis”.
Please note lunch will take place before the seminar, between 12.45 and 1 pm, with the presentation starting only at 1 pm.
Remember also that WISE went green, thus we kindly ask you to confirm by email your participation to the seminar in due time, in order to allow to prepare the right amount of food. Please remember also to state whether you require a vegetarian option!
Thank you and looking forward to seeing you all at WISE
- The WISE staff
The blog of the Wednesday Informal Seminar in Economics (WISE)