This was part of Distributed Solutions to Complex Societal Problems Reunion Workshop

Optimal bubble riding in a large population

Ludovic Tangpi, Princeton University
Thursday, February 23, 2023

Abstract: Recent financial bubbles such as the emergence of cryptocurrencies and ``meme stocks" have attracted a large number of both retail and institutional investors. To study this phenomenon, we propose a game-theoretic model on optimal liquidation in the presence of an asset bubble. Our setup allows the influx of traders to fuel the price of the asset as they take advantage of the uptrend. However, traders face the risk of an inevitable (but unforeseen) market crash. In this talk we will argue that the above ``bubble riding game’’ gives rise to an interesting class mean field games. We will discuss solvability of the game and numerical simulations of the solution, which allow us to provide some intriguing insights on the relationship between the bubble burst and equilibrium strategies. This talk is based on a joint work with Shichun Wang (Princeton University).