Monday, November 9, 2015

Noahpinion's Panics and Bubbles Reading List

From Noahpinion:
Tony Yates offers his reading list on "Panics and Bubbles". 
The list has some good stuff on it. Diamond-Dybvig, Geanakoplos, and Cogley and Sargent especially stand out. There's also some good stuff on how "expectation shocks" can cause economic fluctuations - for example, Angeletos and Werning, Farmer, etc.
There were one or two incongruous things. (Money search? What does money search have to do with panics and bubbles??) But mostly good stuff to read. 
However, there's also a lot that I think Tony left out. His list skews heavily toward macro and money-based models, usually with rational expectations but with a few learning-based models thrown in. It is also mostly made up of theory papers, with little empirical work. This is understandable, since macro theory is what Tony does. But there are a lot of good non-macro and empirical papers out there on the topic of "Panics and Bubbles". For example:
Harrison and Kreps (1978) model how overconfidence can lead to asset price volatility. 
Scheinkman & Xiong (2003) follow up. Barber and Odean (2001) provide some evidence. 
In fact, there are a bunch of papers, both theoretical and empirical, on heterogeneous beliefs and their role in asset pricing. Here is a good overview by Xiong. Here is a classic 1994 paper by Morris and a classic 1993 paper by David Romer. Here is a good, short, simple discussion paper by Barsky, talking about the Japanese bubble. 
Heterogeneous beliefs are closely connected with learning. Tony mentioned some learning-based macro models, but I'd also point people to this elegant 1999 paper by Zeira on how learning can produce bubbles even in very simple settings. 
Noise trader models are another important strain of the literature. Start with DeLong et al. (1990) and the various offshoots of that paper. Another very important paper is Abreu & Brunnermeier (2003). Mendel and Shleifer (2012) is yet another good one. Then check out Brunnermeier and Nagel (2004) on hedge funds and the technology bubble for some evidence. 
A mostly forgotten but incredibly interesting strand of research was the "information cascades" literature, that models bubbles as herd behavior. Check out papers by Avery and Zemsky (1998), Chari and Kehoe (2003), and Park and Sabourian (2009).....MORE