Model
Digital Document
Publisher
Florida Atlantic University Digital Library
Description
The existence of market bubbles raises questions about economists‘ long held assumptions of rationality, costless arbitrage, and the efficient market hypothesis. I take a
theoretical approach to the debate on market efficiency by modeling a ―no-value asset,‖
which are residential vacant lots that cannot be developed. I employ a data set that
naturally controls for a number of market characteristics thought to contribute to
inefficiency. I find that no-value assets traded persistently during the market upturn, in
the early 2000s, suggesting limits to arbitrage. In the absence of inefficiency-causing
market characteristics, the behavior of agents is likely the cause. To corroborate this
claim, I create an investor confidence index using a ratio of sales to stressed sales and
find that inefficiencies were present when investor confidence was high, supporting the
idea of “irrational exuberance” on the part of traders.
theoretical approach to the debate on market efficiency by modeling a ―no-value asset,‖
which are residential vacant lots that cannot be developed. I employ a data set that
naturally controls for a number of market characteristics thought to contribute to
inefficiency. I find that no-value assets traded persistently during the market upturn, in
the early 2000s, suggesting limits to arbitrage. In the absence of inefficiency-causing
market characteristics, the behavior of agents is likely the cause. To corroborate this
claim, I create an investor confidence index using a ratio of sales to stressed sales and
find that inefficiencies were present when investor confidence was high, supporting the
idea of “irrational exuberance” on the part of traders.
Member of