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Bubble geometry and chaotic pricing behaviour

By Chris Eves, Christopher Wright and Rod Jefferies

Abstract

This paper is a deductive theoretical enquiry into the flow of effects from the geometry of price bubbles/busts, to price indices, to pricing behaviours of sellers and buyers, and back to price bubbles/busts. The intent of the analysis is to suggest analytical approaches to identify the presence, maturity, and/or sustainability of a price bubble. We present a pricing model to emulate market behaviour, including numeric examples and charts of the interaction of supply and demand. The model extends into dynamic market solutions myopic (single- and multi-period) backward looking rational expectations to demonstrate how buyers and sellers interact to affect supply and demand and to show how capital gain expectations can be a destabilising influence – i.e. the lagged effects of past price gains can drive the market price away from long-run market-worth. Investing based on the outputs of past price-based valuation models appear to be more of a game-of-chance than a sound investment strategy

Topics: 150202 Financial Econometrics, 150403 Real Estate and Valuation Services, property market behaviour, market equilibrium, market-worth, price bubble, rational expectations, value-estimate
Publisher: Pacific Rim Real Estate Society
Year: 2008
OAI identifier: oai:eprints.qut.edu.au:28883

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