How the Asymmetric Information Creates Bubbles in Stock Market?

Abstract

We analyze the mechanism of creating bubbles under asymmetric information through literature review. Our hypothesis is that information asymmetry will lead to herd behavior and then herd behavior will create bubbles. We find papers and evidences to support our hypothesis. However, after those literature reviews, we consummated our hypothesis and gave a conclusion. Our conclusion is the information asymmetry which can lead to herd behavior and there is a transaction phase. Herd behavior can create bubbles only when shocks come into the market. The bubble will enhance the herd behavior and then further create bubbles. In the first part of our hypothesis, we find three types of papers to support information asymmetry which can lead to herd behavior, which are theoretical model, mathematical model and experiment. It is similar in the second part of our hypothesis, which is herd behavior that can create bubbles.