Rational Agents and Irrational Bubbles

Krichevskiy, Dmitriy; Qirjo, Dhimitri

doi:10.1016/b978-0-12-811252-6.00007-4

Cited by 1 publication

(1 citation statement)

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“…While the other group of investors called "noise traders" rely on incomplete information and an emotional basis. Therefore, these investors will amplify these price variations and overreact to new information since they pay very little importance to the fundamentals (Krichevskiy and Qirjo, 2017). From a theoretical perspective, behavioral finance stipulates that rational investors' arbitrage might be affected by irrational investors' decisions in trading speculative assets.…”

Section: Introductionmentioning

confidence: 99%

Investor behavior and cryptocurrency market bubbles during the COVID-19 pandemic

Mnif

Salhi

Mouakhar

et al. 2022

RBF

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PurposeCryptocurrencies lack fundamental values and are often subject to behavioral bias leading to market bubbles. This study aims to investigate the contribution of the coronavirus pandemic to the creation of market bubbles.Design/methodology/approachThis study identifies four major cryptocurrency market bubbles by using the Phillips et al. (2016) (hereafter PSY) test. Subsequently, the co-movements of the coronavirus proxies with PSY measurement using the wavelet approach were studied.FindingsShort-lived bubbles are detected at the beginning of the studied period, and more extended bubble periods are identified at the end. Besides, the empirical results show evidence of significant negative co-movement between each pandemic proxy and each cryptocurrency bubble measurement.Research limitations/implicationsGiven the complex financial dynamics of the cryptocurrency markets due to some behavioral biases in some circumstances, investors can benefit from the date stamping of the bubbles bursting to make the best trading positions. In the same way, governments could support the healthy development of cryptocurrencies by preventing bubbles during such pandemics.Originality/valueThe financial bubble is commonly attributed to a change in investor behavior. Because traders and investors think they can resell the asset at a higher price in the future. This study explored the contribution of the COVID-19 pandemic in the creation of these bubbles by date stamping their occurrence and explosive periods. To the best of the authors’ knowledge, this study is the first attempt that explores the contribution of the COVID-19 pandemic to the creation of bubbles caused by a change in the investors’ behavior.

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Section: Introductionmentioning

confidence: 99%