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Role Of Diversification Risk In Financial Bubbles

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Executive Summary

The authors present an extension of the Johansen-Ledoit-Sornette (JLS) model to include an additional pricing factor called the "Zipf factor", which describes the diversification risk of the stock market portfolio. Keeping all the dynamical characteristics of a bubble described in the JLS model, the new model provides additional information about the concentration of stock gains over time. This allows them to understand better the risk diversification and to explain the investors' behavior during the bubble generation.

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