This article provides a microfoundation for the rise in optimism that seems to precede market crashes. Small, young markets are more likely to experience stock-price run-ups and crashes. We use a Zeira-Rob type of model in which demand size is uncertain. Optimism then grows rationally if...

Micreconomic data show two important facts about new products. First, some products are more important than others. Second, it takes them years to penetrate the market significantly. The authors' calibrated model with these features overpredicts the autocovariance of U.S. GNP at long lags but...