In macroeconomics , a market situation is referred to as a speculative bubble ( also known as a financial bubble or bubble ) in which the prices of one or more commodities (e.g. commodities or food ) , assets ( real estate and securities such as for example stocks or bonds ) with high turnover above theirsintrinsic value (also: fundamental value or intrinsic value).
In the case of speculative bubbles, markets show a recurring pattern of prices that rise sharply when sales are high and then collapse, up to and including a stock market crash ( bubble-and-crash pattern ). This price movement pattern is not limited to modern, highly interconnected financial markets , but has been documented as early as the 17th and 18th centuries as a result of the tulip mania , Mississippi and South Sea bubbles.
With increasing networking of the international financial markets , the interest of economics in the analysis of these phenomena also increased, especially because these (extreme) price movements are seen as problematic for the entire economy. Market prices influence the investment decisions of market participants and have a direct impact on companies ' capital costs . As a result, extreme price movements, such as those observed in bubble-and-crash patterns in the financial sector , can spread to the real economy and have a negative impact on it. This connection is also known as the spillover effect .
causes and emergence
The reasons for the emergence and bursting of speculative bubbles are not clear and are the subject of controversial economic discussions. The basic problem is the determination of the fundamental value , since there is no uniform determination method. Speculative bubbles cannot be explained within the framework of models based on the market efficiency hypothesis and the theory of rational expectations , such as modern portfolio theory or the capital asset pricing model . If market participants have complete information and act rationally, the market generally strives for equilibrium and volatilities are normally distributed . According to the theory, the price of an asset corresponds to the present values of future expected cash flows. Accordingly, markets are efficient and in equilibrium if prices only change as a result of changed expectations regarding future cash flows based on new information. In the short term, overvaluations could arise, which would be recognized by some market participants and ended by appropriate action (e.g. short selling ).
A market based on the models mentioned shows a so-called random walk , random price movements. However, trends that tend to show distributions with heavy margins are observed empirically in real markets. Benoit Mandelbrot described in his work on price changes in stocks, cotton and other commodities that these follow a Lévy distribution , are scale-free and self-similar (fractal). In distributions of this type, bubbles and crashes are rare but expected events. The work of Mandelbrot is largely ignored in economics, and extreme market movements are attributed to abnormal events or shocks.
The assumption is widespread that speculative bubbles are evidence of a lack of market efficiency , irrational behavior on the part of market players and high levels of uncertainty in real markets.
The following possible causes for the formation of bubbles are discussed in the literature.
In behavioral economics , market participants are assumed to have limited rationality . This assumption leads to the hypothesis that cognitive difficulties in the implementation of theoretical price models lead to short-term incorrect valuations and thus bubbles. Starting with the work of Kahnemann and Tversky , and later De Bondt and Thaler , it was found that people are unable to react quickly and rationally to changing circumstances, in this case market trends. They prefer to believe what they believed before the trend change because otherwise they would have to question their basic assumptions and behaviors. In their prospect theory , Kahnemann and Tversky postulate an asymmetry between gains and losses. Economic benefit is not derived from absolute wealth, but from relative gains and losses. If investors are confronted with certain profits, they behave risk-aversely, while with certain losses they become more willing to take risks.
The Greater Fool hypothesis assumes that there is always someone in the market willing to pay an even higher price . So if an individual investor has already knowingly paid a price above the intrinsic value, he assumes that he can sell the investment again at an even higher price, ie he finds an even bigger fool . In order to generate a cumulative effect, i.e. a longer-term continuation of this mechanism, an overestimation of the investors' own ability to correctly value investment objects must be implied. As a result, investors overestimate the number of people willing to pay even higher prices. If no one is willing to accept these inflated prices, the hypothesis is that prices will correct. The systematic overestimation of one's own abilities is referred to in social psychology as self -serving bias .
Institutionalization and herd behavior
In the social science literature, institutionalization is described as the binding of individual behavior to social norms. Individual investors do not rely on their own perception, but orientate themselves at least partially on their environment and follow the behavior of others ( herding ) . This doesn't have to be through established or agreed-upon rules (such as the legal system), but can arise spontaneously and persist over a longer period of time, even if this behavior is irrational. A mechanism described is the so-called English positive feedback trading , where investors make their decisions based on historical performance, i. H. they buy when prices rise and sell when they fall. Investors follow the market or the herd.
The research on herd behavior in the financial market can be divided into four overlapping categories:
- Informational cascades : Investors ignore or downplay their own information and choose to imitate the behavior of other investors. The aggregate information of the crowd outweighs any private information that the individual has. This effect can be transferred to other investors and can thus lead to a domino effect .
- Reputational herding : Investors follow other investors with a high reputation or reputation.
- Investigative herding : Investors or analysts investigate things with the assumption that others will do so in the future.
- Empirical herding : Investors follow the herd with no specific model or explanation, relying instead on the momentum generated by others . In terms of positive feedback trading , for example, investors rely on investments that have already gone well in the past.
Speculative behavior is motivated by the pursuit of (financial) gain. The prices on the market reflect these expectations. Speculative trading participants assume that not all market participants behave rationally and that future profits are independent of intrinsic value. This is essentially a bet on rising prices.
Some economists believe that speculative bubbles have the same causes as inflation. However, the theory is not consistent with the observation that speculative bubbles can also form during periods of low inflation.
Robert Shiller describes the hallmarks of speculative bubbles:
- a sharp rise in prices
- circulating information about suspected reasons and justifications for the high prices
- a significant number of people reporting how much money they make in the stock market
- a significant number of people who are envious and upset that they didn't get on
- media coverage reinforcing these trends
Experimental markets are model studies that are used to test the possible causes for the creation and bursting of speculative bubbles in the laboratory. In the literature, Smith , Suchanek, and Williams' 1988 study entitled Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets is cited as seminal and fundamental to subsequent experimental investigations. The aim is to investigate which parameters and conditions influence the formation of bubbles. Among other things, the qualification and composition of the participants, the dividend structure , the market mechanisms, the information available to the market participants, the monetary incentives and the number and type of markets that work simultaneously or sequentially are varied. In most cases, blisters form and clear causes for this have not yet been identified. The frequency of dividend payments, the process of determining the fundamental value and the experience of the market participants are named as parameters with the greatest potential for preventing speculative bubbles.
- 1637: On February 7th, the tulip bulb speculation in Holland , which had been going on since around 1634, bursts .
- 1700: The Darién Society is no longer able to redeem its shares after the project fails.
- 1720: Speculation with the Mississippi Company share certificates in France ( Mississippi Bubble , Mississippi Bubble )
- 1720: Speculation with the shares of the South Sea Company in England ( Südseeblase , South Sea Bubble )
- 1873: Railroad speculation in North America
- 1873: On May 9th ( Black Friday ) the bubble of the German Wilhelminian period bursts : the founder crisis .
- 1929: On October 24 ( Black Thursday ), stock market prices plummet, the crash culminating on Black Tuesday (English Black Tuesday , October 29), which triggered the Great Depression and the Great Depression .
- 1970s: Silver speculation by the Texas Hunt brothers creates a bubble in silver
- 1990: The stock and real estate bubble of the 1980s in Japan bursts
- 2000: In mid-March, speculation in shares in the Internet and telecommunications sectors peaked ( dot-com bubble ). In the three years that followed (until March 2003), many of the courses collapsed by more than 90 percent.
- 2007: The housing bubble in the United States bursts. This so-called subprime crisis triggered a chain reaction in a banking crisis in the USA, which was followed by the financial crisis in most industrialized nations from 2007 onwards .
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