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The Classification and Identification of Asset Price Bubbles

This article briefly summarizes approaches to and options for identifying bubbles in asset prices. Further, the article draws on bubble literature and it theoretically discusses classification of asset price bubbles according to features as differences in rationality of investors, their informational (a)symmetry, limits in arbitrage and heterogeneous beliefs. It also highlights the identification problems related with determining the fundamental value of an asset. We argue that disequilibrium asset price is a necessary but not sufficient condition for finding a bubble in a given asset. The market and country specifics have to be borne in mind. The article also specifies the procedure for monitoring and early identification of asset price bubbles. We recommend using all available spectrum of tools in the most effective arrangement ranging from charting methods (trends, filters, price-to-income ratios) via one-equation fundamentals based models to complex and structurally rich models.

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Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 61 (2011)
Issue (Month): 1 (January)
Pages: 34-48

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Handle: RePEc:fau:fauart:v:61:y:2011:i:1:p:34-48
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  1. Refet Gurkaynak, 2005. "Econometric Tests of Asset Price Bubbles: Taking Stock," Finance 0504008, EconWPA.
  2. Pietro Veronesi & Lubos Pastor, 2005. "Was There a Nasdaq Bubble in the Late 1990s?," 2005 Meeting Papers 95, Society for Economic Dynamics.
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  4. Diba, Behzad T & Grossman, Herschel I, 1988. "The Theory of Rational Bubbles in Stock Prices," Economic Journal, Royal Economic Society, vol. 98(392), pages 746-54, September.
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  9. Alessi, Lucia & Detken, Carsten, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
  10. Menkhoff, Lukas & Taylor, Mark P., 2006. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Hannover Economic Papers (HEP) dp-352, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
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  12. Markus K. Brunnermeier & Stefan Nagel, 2004. "Hedge Funds and the Technology Bubble," Journal of Finance, American Finance Association, vol. 59(5), pages 2013-2040, October.
  13. Dubecq, S. & Mojon, B. & Ragot, X., 2009. "Fuzzy Capital Requirements, Risk-Shifting and the Risk Taking Channel of Monetary Policy," Working papers 254, Banque de France.
  14. Jan Frait & Luboš Komárek, 2007. "Monetary Policy and Asset Prices: What Role for Central Banks in New EU Member States?," Prague Economic Papers, University of Economics, Prague, vol. 2007(1), pages 3-23.
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  16. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: Challenges for macroeconomics and policy," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1426-1461, December.
  17. Bask , Mikael & Fidrmuc , Jarko, 2006. "Fundamentals and technical trading: behaviour of exchange rates in the CEECs," Research Discussion Papers 10/2006, Bank of Finland.
  18. Peter M. DeMarzo & Ron Kaniel & Ilan Kremer, 2008. "Relative Wealth Concerns and Financial Bubbles," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 19-50, January.
  19. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
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