We review theory and evidence relating to herd behaviour, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, and evaluate how alternative theories may help explain evidence on the behavior of investors,...

This paper examines how monetary expansion causes asset bubbles. When there is no monetary expansion, a bubbly asset is not created due to a hold-up problem. Monetary expansion increases buyers' money holdings, and then, dealers are willing to buy a worthless asset from sellers, in hopes of...

This paper develops a model of rational bubbles where trade of an asset takes place through a chain of middlemen. We show that there exists a unique and robust equilibrium, and a bubble can occur due to information frictions in bilateral and decentralized markets. Under reasonable assumptions,...

In a market with informationally connected traders, the dynamics of volume, price informativeness, price-volatility, and price-impacts are severely affected by the number of information linkages every trader experiences with his neighbors. We show that in the presence of information linkages...

Investors who possess the same information and interpret it differently are said to have divergent (as distinct from) homogeneous expectations. Financial economists have widely frowned on the divergent expectations assumption. Nevertheless, this assumption describes reality and is critically...

This paper develops a market microstructure model with asymmetric information in order to quantify the influence which practical decision rules have on asset prices. The users of practical decision rules have incomplete information at their disposal and trade in a market with both fully informed...

This study shows that the information content of FX transactions depends on the identity of market participants. Using spot FX transactions of a major Australian bank, we find that central banks have the greatest price impact, followed by non-bank financial institutions (NBFIs) such as hedge...

The paper contrasts theories that explain diverse belief by asymmetric private information (in short PI) with theories which postulate agents use subjective heterogenous beliefs (in short HB). We focus on problems where agents forecast aggregates such as profit rate of the Samp;P500 and our...

This paper extends the Santa Fe Artificial Stock Market Model (SFASM) studied by LeBaron, Arthur and Palmer (1999, Journal of Economic Dynamics and Control 23, 1487-1516) in two important directions. First, some might question whether it is reasonable to assume that traders are capable of...

Traders differ in speed and their speed differences matter. I model strategic interactions induced when high frequency traders (HFTs) have different speeds in an extended Kyle (1985) framework. HFTs are assumed to anticipate incoming orders and trade rapidly to exploit normal-speed traders'...