Asset price bubble: Difference between revisions
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An '''asset price bubble'' is surge in prices that raises expectations of further increases, so generating further increases, and so on: a process that continues until confidence falters, the bubble "bursts" and prices suddenly revert to an objectively-based level. | An '''asset price bubble''' is surge in prices that raises expectations of further increases, so generating further increases, and so on: a process that continues until confidence falters, the bubble "bursts" and prices suddenly revert to an objectively-based level. Asset price bubbles can cause extensive economic damage and can even threaten the integrity of the financial system. | ||
==The nature of asset price bubbles== | ==The nature of asset price bubbles== | ||
Revision as of 10:41, 1 December 2009
An asset price bubble is surge in prices that raises expectations of further increases, so generating further increases, and so on: a process that continues until confidence falters, the bubble "bursts" and prices suddenly revert to an objectively-based level. Asset price bubbles can cause extensive economic damage and can even threaten the integrity of the financial system.
The nature of asset price bubbles
A steep and sustained price rise and then its precipitous collapse, both unrelated to the asset's properties - that is the pattern of events which has characterised hundreds of episodes from the "South Sea Bubble" of the 17th century to the housing bubbles of the early 21st century. There is no objective way of assessing the truth of any of the various explanations that have been advanced for them. Their "information cascade" component has been observed in other contexts [1], and the "herding" behaviour that they exhibit has characterised the conduct of the subjects of many experimental studies of human behaviour[2]. A surge in share prices has been termed "irrational exuberance"[3], but whether the term "irrational" is justified turns on the choice of interpretation.
History
Consequences
Leading indicators
Notes and References
- ↑ Sushil Bikhchandani, David Hirshleifer, and Ivo Welch Information Cascades and Rational Herding: An Annotated Bibliography and Resource Reference
- ↑ Solomon Asch: Effects of Group Pressure upon the Modification and Distortion of Judgments in H Guetzkow (ed) "Groups,Leadership and Men", Carnegie Press, 1951
- ↑ Alan Greenspan: The Challenge of Central Banking in a Democratic Society,(Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research, December 5, 1996) Federal Reserve Board 1996