Surprised by interest rate hikes? Really?
https://www.washingtonpost.com/opinions/2023/03/23/interest-rates-banks-inflation-economy/
Megan McArdle:
Herd mentality offers an explanation. It’s not entirely irrational to think that if everyone else is doing something, it must be a good idea. Moreover, the herd’s behavior can shape reality: If everyone thinks Tesla is worth a zillion dollars a share, it will be. And if everyone thinks a bank is insolvent, that bank will fail, no matter how well capitalized or soundly regulated it is.
Over the long term, markets do eventually discover, and correct, mistakes. But in the short term, the herd can run in the wrong direction for a long time. As the old Wall Street saw goes, the market can stay irrational longer than you can stay solvent.
NFT Bubbles by Andrea Barbon and Angelo Ranaldo
https://arxiv.org/pdf/2303.06051.pdf
Abstract
By investigating nonfungible tokens (NFTs), we provide the first systematic study of retail investor behavior through asset bubbles. Given that NFTs are recorded in public blockchains, we are able to track investor behavior over time, leading to the identification of numerous price run-ups and crashes. Our study reveals that agent-level variables, such as investor sophistication, heterogeneity, and wash trading, in addition to aggregate variables, such as volatility, price acceleration, and turnover, significantly predict bubble formation and price crashes. We find that sophisticated investors consistently outperform others and exhibit characteristics consistent with superior information and skills, supporting the narrative surrounding asset pricing bubbles.
https://www.washingtonpost.com/opinions/2023/03/23/interest-rates-banks-inflation-economy/
Megan McArdle:
Herd mentality offers an explanation. It’s not entirely irrational to think that if everyone else is doing something, it must be a good idea. Moreover, the herd’s behavior can shape reality: If everyone thinks Tesla is worth a zillion dollars a share, it will be. And if everyone thinks a bank is insolvent, that bank will fail, no matter how well capitalized or soundly regulated it is.
Over the long term, markets do eventually discover, and correct, mistakes. But in the short term, the herd can run in the wrong direction for a long time. As the old Wall Street saw goes, the market can stay irrational longer than you can stay solvent.
https://arxiv.org/pdf/2303.06051.pdf
Abstract
By investigating nonfungible tokens (NFTs), we provide the first systematic study of retail investor behavior through asset bubbles. Given that NFTs are recorded in public blockchains, we are able to track investor behavior over time, leading to the identification of numerous price run-ups and crashes. Our study reveals that agent-level variables, such as investor sophistication, heterogeneity, and wash trading, in addition to aggregate variables, such as volatility, price acceleration, and turnover, significantly predict bubble formation and price crashes. We find that sophisticated investors consistently outperform others and exhibit characteristics consistent with superior information and skills, supporting the narrative surrounding asset pricing bubbles.