New BERG Working Paper No. 177 by Roberto Dieci, Noemi Schmitt and Frank Westerhoff published!

In the BERG Working Paper Series 177 Roberto Dieci, Noemi Schmitt and Frank Westerhoff have published a new paper entitled "Boom-bust cycles and asset market participation waves: momentum, value, risk and herding".

A complete overview of all BERG Working Papers published so far can be found here.



We develop an asset market participation model in which investors base their market entry decisions on the momentum, value and risk of the market. Despite our behavioral framework, the model’s fundamental steady state is characterized by standard present-value relations between expected future payouts and the model-implied risk-adjusted return. We derive conditions under which endogenous asset market participation waves and co-evolving boom-bust cycles emerge. Moreover, we show that the asset market may display spontaneous, sharp and permanent downturns if investors react sensitively to risk, an outcome that goes hand in hand with low asset market participation rates and excess volatility.