Asset Price Bubble
An asset price bubble refers to a rapid and unsustainable increase in the prices of assets, such as stocks, real estate, or commodities, driven by speculation rather than intrinsic value. These bubbles often lead to inflated asset prices that eventually collapse, causing significant economic disruption. Central banks and policymakers closely monitor asset price bubbles to mitigate their potential negative impact on the economy.
8 Key excerpts on "Asset Price Bubble"
eBook - ePubUnderstanding Central Banking
The New Era of Activism
- David M Jones(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...7 Asset Price Bubbles While it is true that asset bubbles are not new, it is also certainly the case that over the past quarter century or so, globalization, deregulation, and financial innovation have resulted in a plethora of Asset Price Bubbles. Combine an unprecedented period of highly accommodative monetary policy moves with recurring bouts of collective investor enthusiasm and the conditions could not have been more favorable for global Asset Price Bubbles. This point is underscored in remarks by Fed chair Ben Bernanke in his discussion of the global impact of repeated efforts to increase monetary policy accommodation. Specifically, in remarks on October 14, 2012, the Fed chair admitted that Fed “unconventional” asset purchases, and an accommodative monetary policy more generally, encouraged capital flows to emerging market economies. These capital flows, according to Bernanke, are said to cause undesirable currency appreciation, too much liquidity leading to asset bubbles or inflation, or economic disruption as capital inflows quickly give way to outflows. D EFINITION The definition of an “Asset Price Bubble” (stocks, real estate) is a temporary surge in asset prices caused by the collective enthusiasm of market participants rather than the consistent estimation of the real value of the assets involved. One example of contemporary Asset Price Bubbles is the powerful Japanese Asset Price Bubble in the late 1980s, involving soaring real estate prices accompanied by surging stock prices, from which the Japanese financial system and economy are yet to fully recover. Another example of a striking Asset Price Bubble is the U.S. hightech (dotcom) stock price bubble that formed in the late 1990s...
eBook - ePub- Piyush Tiwari, Michael White(Authors)
- 2014(Publication Date)
- Wiley-Blackwell(Publisher)
...A bubble could also be described as a trade in assets with inflated values. Economists have attributed uncertainty (Smith et al., 1988) speculation (Lei et al., 2001), or bounded rationality (Levine et al., 2008), as the causes for bubbles. However, recent evidence suggests that bubbles even happen in the absence of these. It has been suggested that bubbles might ultimately be caused by processes of price coordination or emerging social norms. Since it is often difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect, when a sudden drop in prices appears. The boom and the bust phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate erratically and become impossible to predict from supply and demand alone. The focus of this chapter is on real estate asset bubbles. A starting point to understand the bubbles is the financial theory on ‘market efficiency’. According to Malkiel (as quoted in Malpezzi, 2004), ‘a capital market is said to be efficient if it fully and correctly reflects all relevant information in determining security prices…Formally, the market is said to be efficient with respect to some information set…implies that it is impossible to make economic profits by trading on the basis of [that information set]’. If the capital markets are efficient, opportunities for excess or abnormal returns do not exist. Since all the information is incorporated into prices, the investor is unable to make profits by trading on the information. The aforementioned definition is a theoretical definition of market efficiency and is seldom satisfied. Based on the information set, three common definitions of market efficiency have been used...
eBook - ePubBanking Crises
Perspectives from the New Palgrave Dictionary of Economics
- Garett Jones, Garett Jones(Authors)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
...speculative bubbles We maintain that a speculative bubble exists if the market price of an asset differs from its fundamental value – the expected present value of the stream of future dividends attached to the asset. In an economy with a finite sequence of trading dates, the fundamental theorem of asset pricing (see Dybvig and Ross, 1987) guarantees that the equilibrium market price of any asset equals its fundamental value. But in some economies with an infinite sequence of trading dates, this result does not hold, and speculative bubbles may arise. An investor might buy an asset at a price higher than its fundamental value if she expects to sell it later on at a higher price – Harrison and Kreps (1978) call this process ‘speculative behaviour’. In general equilibrium models, however, agents take prices as given and trade assets to transfer income across time and states. These models do not contemplate ‘speculative behaviour’ as it is usually understood. Therefore, the term ‘speculative bubble’ may seem inappropriate in some theoretical frameworks. Santos and Woodford (1997) talk broadly about ‘asset pricing bubbles’. There have been famous historical examples of sudden asset price increases followed by an abrupt fall as the Dutch ‘tulipmania’ (1634–7), the ‘Mississippi bubble’ (1719–20) and the ‘South Sea bubble’ (1720). Kindleberger (1978) argues that these are examples of bubbles, whereas Garber (2000) provides market-fundamental explanations for these episodes. More recently, we have seen sharp changes in stock and housing markets. The Japanese stock and land prices experienced a sharp rise in the late 1980s and a dramatic fall in the early 1990s. During the ‘technology bubble’, the Nasdaq Composite Index rose by more than 300 per cent between August 1996 and March 2000, and then fell sharply, reaching the August 1996 level in October 2002...
eBook - ePubFinancial Market Bubbles and Crashes, Second Edition
Features, Causes, and Effects
- Harold L. Vogel(Author)
- 2018(Publication Date)
- Palgrave Macmillan(Publisher)
...Part IV Roundup As the previous pages have shown, the subject of financial market bubbles and crashes is broad and deep. This last section summarizes the major points and suggests directions for further research. © The Author(s) 2018 Harold L. Vogel Financial Market Bubbles and Crashes, Second Edition https://doi.org/10.1007/978-3-319-71528-5_11 Begin Abstract 11. Financial Asset Bubble Theory Harold L. Vogel 1 (1) New York, NY, USA End Abstract Financial Asset Price Bubbles are not unique to any time or place. For at least the last 400 years they have been experienced in many different nations and cultures. And had extensive money and credit creation and recording systems existed in earlier times, we can surmise that bubbles would have occurred then too. Price bubble effects and artifacts have been seen in everything from stocks and bonds to tulip bulbs, real estate, gold, art, and all other types of commodities and asset classes. Yet there have often been relatively long periods without any important bubbles or crashes and other periods in which such episodes—in effect volatility clusters —have appeared rather frequently. The transition from tranquil to bubble-condition trading is always accompanied by availability of money and credit that is in excess of what is required in the conduct of GDP transactions. Even so, however, for all the work on trying to understand such phenomena by parsing price changes into fundamental value and bubble components, there has been virtually no progress to date. “Distinguishing bubbles from increases in asset prices driven by fundamentals (or sensible beliefs about the future development of fundamentals) is no easy matter.” 1 That is not for lack of effort, though...
eBook - ePub- Ananish Chaudhuri(Author)
- 2021(Publication Date)
- Routledge(Publisher)
...The collapse began when buyers refused to show up at a tulip bulb auction in Haarlem, which was suffering from an outbreak of bubonic plague. This outbreak might also have helped to burst the bubble. Studying asset bubbles in the lab An asset or price bubble is a situation where the price of an asset far exceeds the asset’s fundamental value. For instance, consider a house. The price of the house should reflect the value of the land on which the house stands as well as the total cost of the building itself. While there is certainly scope for differences in valuation and, therefore, some deviation in the price of the house from its underlying value, these deviations should not be huge, and, in any event, should not persist for long periods of time. A similar argument is true of shares in a company. The current price of the share should reflect the risk adjusted discounted value of expected future dividends to be paid on it. 5 So, the current price should subsume all the relevant information and this price should not change unless something fundamental changes about the company, people’s expectations or the market conditions. This, in turn, implies that prices should track the fundamental value closely and that it should be difficult to “beat the market” by buying and selling such shares. If all traders are perfectly rational and equally well informed about the market conditions, then they should all price the share in a similar way. This idea that prices of financial assets such as shares should track the fundamental value is the essence of the efficient markets hypothesis, as proposed by Eugene Fama of the University of Chicago in the 1970s. But, as we know now, not everyone is rational, or at least not rational to the same extent. They are also not equally well informed and, more importantly, we know that people are subject to a wide range of biases...
eBook - ePubA History of Financial Crises
Dreams and Follies of Expectations
- Cihan Bilginsoy(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...6 Explaining asset-price bubbles and banking crises DOI: 10.4324/9781315780870-6 In his Memoirs of Extraordinary Popular Delusions and the Madness of Crowds Scottish journalist Charles Mackay (2009 [1852]) describes tulip mania, the Mississippi Bubble, and the South Sea Bubble as collective delusions spread across all ranks of society. The same state of mind and herd mentality that tempted people to participate in witch hunts and apocalyptic fantasies, which are among the vignettes that Mackay portrays, was evident in the rush to buy assets with dreams of getting rich(er) overnight. Popular songs, allegorical prints, and sarcastic poems that proliferated at the peak and during the aftermath of these episodes also painted pictures of out-of-control greed and a populace devoid of common sense. While these descriptions are amusing and commonplace, they fall short of explaining why bubbles emerge. Their frequent embellishments also provide an easy foil for commentators who dispute the verisimilitude of the historical accounts. Between the two perceptions of the human condition, i.e. individual optimization under competitive conditions that rules out bubbles, and the collective frenzy that makes them ubiquitous, there is a diverse set of theories that acknowledge the existence of bubbles. These theories attempt either to reconcile bubbles with the canons of the standard economic theory or search for explanations based on alternative behavioral foundations or evolutionary capitalist market dynamics. This chapter is an introduction to the theories of financial crises. It will focus mainly on asset-price bubbles and, to a lesser extent, on banking crises. I classify the competing hypotheses into five categories. First, the orthodox, fundamentals-based approach is characterized by optimizing agents who operate in perfectly competitive markets. Each economic agent is an independent decision maker, guided by the available information on the fundamentals...
eBook - ePubReal Estate Economics
A Point-to-Point Handbook
- Nicholas G. Pirounakis(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...Musson, 1959). Another happened in 1929, involving the US stock market. It caused a depression that ended about 10 years later. The third happened in 2007–08, involving the US housing market and a number of others. It quickly led to a financial-system, and then a sovereign-debt, international crisis. In between the last two, the burst of the Japanese stock- and RE-market bubbles, in 1991, has been notable for the lingering, drawn-out recession it caused in Japan (Kanaya and Woo, 2000) rather than for any severe damage it caused internationally (Nakaso, 2001). At least, this pattern gives academics a long time to study both the causes of bubbles and their bursts, and the effectiveness of pre-emptive measures as well as remedial ones subsequently applied. 2 Asset-price growth typically happens because of increases in demand in excess of increases in supply, 3 due, in the first instance, to ‘fundamental’ forces operating. In the case of housing, such forces are, for example, population growth or rising real incomes. Now, if people bought or built houses using only their accumulated savings from incomes earned, there would be little danger of a house-price bubble forming in the owner-occupied sector, and even less danger of a price ‘correction’ in such a market damaging severely the wider economy. The reason is that ability to pay would then be coterminous with the owner's financial resources, and would not be artificially extended, and made more precarious, by credit. The danger would increase significantly, however, if, even in the absence of credit, the spending capacity of households were augmented by flows of financial capital from overseas or from other sectors of the economy (e.g., the stock market)...
eBook - ePubHousing Bubbles
Origins and Consequences
- Sergi Basco(Author)
- 2018(Publication Date)
- Palgrave Pivot(Publisher)
...© The Author(s) 2018 Sergi Basco Housing Bubbles https://doi.org/10.1007/978-3-030-00587-0_3 Begin Abstract 3. Origin of Asset Price Bubbles Sergi Basco 1 (1) Universitat Autònoma Barcelona, Barcelona, Spain Abstract The recurrence of Asset Price Bubbles throughout history has stimulated the interest of economists in different generations. We divide theories on the origin of bubbles in two: (i) behavioral and (ii) rational. First, we explain how differences in the beliefs of agents may result in bubbles (behavioral explanation). Second, we discuss how Asset Price Bubbles may emerge because the economy has a shortage of assets (rational explanation). Finally, we develop a simple model to explain how rational housing bubbles may appear in financially underdeveloped economies. Keywords Behavioral Rational bubbles Shortage of assets Financial constraint End Abstract Asset Price Bubbles have triggered the interest of distinguished economists across generations. This list includes several Nobel Prize winners. Starting with the late Paul Samuelson, who was awarded in the second edition (1970) and ending with the most recent Nobel Prize winner, Richard Thaler (2017). In between, Robert Shiller (2013) and Jean Tirole (2014) have also been awarded with the Nobel Prize. This (incomplete) list of economists help us to distinguish between two very different views on the origin of Asset Price Bubble episodes. The first group, which includes Samuelson and Tirole, developed models to explain how Asset Price Bubbles can be the rational market response to a market imperfection. The second group, which includes Shiller and Thaler, resorts to behavioral (or irrational) models to explain how boom-bust asset price episodes occur in equilibrium. 1 It is outside the scope of this book to make a formal literature review of these two big strands of the literature...
