Financial bubbles and Behavioral Tatonnement Dynamics

This study shows that Financial Bubbles can be found without any limitations at any moment, leading to a deep variety of ramifications. Due to the high risks and unrealistic expectations, they can occur at any time. Depending on the state of transversality, the representative dynamics can be persistent or negative. Classic rational bubbles arise from the efficient market hypothesis, while representative bubbles can arise from psychological factors and exogenous shocks. Representative bubbles cause booms and busts, with fluctuations steeper than rational ones, and arise from distorted expectations caused by agents’ inability to rationally understand signals.