Wealth-Driven Bubbles in Speculative Markets

Abstract We develop a behavioral model that generates wealth-driven bubbles in speculative asset markets whose fundamental value is zero. These dynamics arise from a feedback loop between asset prices and speculators’ wealth: rising prices increase their wealth, leading them to demand more of the asset, which pushes prices even higher. Bubbles burst when prices become excessively high, prompting speculators to lose confidence and reduce their market exposure. The market may subsequently experience another bubble or collapse to its fundamental value, terminating the dynamics.