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Bubbles

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Bubbles and Contagion in Financial Markets, Volume 1

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Abstract

Every major financial market crash has provoked an avalanche of studies trying to prove or disprove the existence of a bubble that might help explain the crisis. The discussion that ensues typically reflects on whether, as prices increased, investors realized the assets were overvalued. As it is often made clear that this should have been the case, explanations for the participation of agents in the formation of the bubble also begin to mount. During these inflationary events, speculators may trade because they think they will get out in time or because the expected high returns rewards them sufficiently even in the event of a crash.1, 2, 3, 4 However, regardless of the motives for trading, when a bubble bursts, there is great discontinuity in market-clearing prices, and high price volatility follows as a result of excess supply.

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Notes

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    Eva R. Porras (Independent scholar)

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Porras, E.R. (2016). Bubbles. In: Bubbles and Contagion in Financial Markets, Volume 1. Palgrave Macmillan, London. https://doi.org/10.1057/9781137358769_7

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