Template-Type:ReDIF-Paper 1.0
Title: On Rational Bubbles and Fat Tails
Author-Name: Thomas Lux 
Author-Name: Didier Sornette
Author-Postal: Thomas Lux 
	Department of Economics, University of Bonn
	Adenauerallee 24 - 42, 53113 Bonn, Germany
	lux@iiw.uni-bonn.de
	Didier Sornette
	Laboratoire de Physique de la Matihre Condensie, CNRS UMR6622
	Universiti des Sciences, B.P. 70, Parc Valrose; 06108 Nice Cedex 2, France
	and
	Institute of Geophysics and Planetary Physics  and Department of Earth and Space Science
	3845 Slichter Hall, Box 951567, 595 East Circle Drive
	University of California, Los Angeles, California 90095
	sornette@cyclop.ess.ucla.edu
Author-Phone: 0228/73 9519
Author-Homepage: 
Classification-JEL: G12, D84, C32
Keywords: rational bubbles, random difference equations, multiplicative processes, 
	rational bubbles, random difference equations, multiplicative processes, fat tails.
Abstract: This paper addresses the statistical properties of time series driven by rational bubbles a la Blanchard and Watson (1982). Using insights on the behavior of multiplicative stochastic processes, we demonstrate that the tails of the unconditional distribution emerging from such bubble processes follow power-laws (exhibit hyperbolic decline). More precisely, we find that rational bubbles predict a fat power tail for both the bubble component and price differences with an exponent m smaller than 1. The distribution of returns is dominated by the same power-law over an extended range of large returns. Although power-law tails are a pervasive feature of empirical data, these numerical predictions are in disagreement with the usual empirical estimates. It, therefore, appears that exogenous rational bubbles are hardly reconcilable with some of the stylized facts of financial data at a very elementary level.
Length:  
Creation-Date: 1999-10
Revision-Date: 
Handle: RePEc:bon:bonsfb:458
File-URL:http://www.wiwi.uni-bonn.de/bgsepapers/bonsfb/bonsfb458.pdf    
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