IDEAS home Printed from https://ideas.repec.org/a/ids/gbusec/v8y2006i3-4p217-246.html
   My bibliography  Save this article

Predicting bubbles

Author

Listed:
  • Earl A. Thompson
  • Charles R. Hickson

Abstract

While endogenous asset-price bubbles cannot exist without informationally monopolistic market conditions, even when such conditions exist, such bubbles occur under laissez faire only for relatively short durations and only as random and therefore unpredictable phenomena such as in mixed-strategy equilibria. In contrast, governmentally generated bubbles – identifiable by their enormity, long-duration, and concomitant supply increases – are predictable. Two alternative causal observations reveal when one of these enormous bubbles is about to be rationally, albeit probably subconsciously, created by a state's rulers. The first causal observation, government-debt-induced-imminent-revolution, and its underlying model, predict history's most notorious stock-market bubbles (i.e. the South Sea and Mississippi Bubbles.) The modern emergence of strong central governments, which came with the advent of government-debt-holding central banks, has made such bubbles obsolete. The second causal observation is a suddenly diminished governmental concern for its middle class. This observation predicts bubbles as a secondary part of a sequence of governmental-redistribution-based policy-complements.

Suggested Citation

  • Earl A. Thompson & Charles R. Hickson, 2006. "Predicting bubbles," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 8(3/4), pages 217-246.
  • Handle: RePEc:ids:gbusec:v:8:y:2006:i:3/4:p:217-246
    as

    Download full text from publisher

    File URL: http://www.inderscience.com/link.php?id=10135
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    2. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, pages 35-54.
    3. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    4. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
    5. J. D. Gould, 1954. "THE TRADE DEPRESSION OF THE EARLY 1620's," Economic History Review, Economic History Society, vol. 7(1), pages 81-90, August.
    6. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130 World Scientific Publishing Co. Pte. Ltd..
    7. E. Thompson, 1966. "A pareto optimal group decision process," Public Choice, Springer, vol. 1(1), pages 133-140, December.
    8. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," Review of Financial Studies, Society for Financial Studies, pages 123-152.
    9. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, pages 724-748.
    10. Thompson, Earl A & Faith, Roger L, 1981. "A Pure Theory of Strategic Behavior and Social Institutions," American Economic Review, American Economic Association, pages 366-380.
    11. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130 World Scientific Publishing Co. Pte. Ltd..
    12. Albert S. Kyle & Jean-Luc Vila, 1991. "Noise Trading and Takeovers," RAND Journal of Economics, The RAND Corporation, pages 54-71.
    13. Copeland, Thomas E & Friedman, Daniel, 1991. " Partial Revelation of Information in Experimental Asset Markets," Journal of Finance, American Finance Association, vol. 46(1), pages 265-295, March.
    14. Chan, Kalok & Chan, K C & Karolyi, G Andrew, 1991. "Intraday Volatility in the Stock Index and Stock Index Futures Markets," Review of Financial Studies, Society for Financial Studies, pages 657-684.
    15. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, pages 503-529.
    16. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 61(2), pages 206-229, December.
    17. Saari, Donald G & Simon, Carl P, 1978. "Effective Price Mechanisms," Econometrica, Econometric Society, vol. 46(5), pages 1097-1125, September.
    18. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    19. Foster, F. Douglas & Viswanathan, S., 1994. "Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(04), pages 499-518, December.
    20. Cheung, Yin-Wong & Ng, Lilian K, 1992. " Stock Price Dynamics and Firm Size: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 47(5), pages 1985-1997, December.
    21. Bala, Venkatesh & Kiefer, Nicholas M., 1994. "On the existence of universally convergent mechanisms," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 299-316, March.
    22. Melvin, Michael & Tan, Kok-Hui, 1996. "Foreign Exchange Market Bid-Ask Spreads and the Market Price of Social Unrest," Oxford Economic Papers, Oxford University Press, vol. 48(2), pages 329-341, April.
    23. Kerry Back & Shmuel Baruch, 2004. "Information in Securities Markets: Kyle Meets Glosten and Milgrom," Econometrica, Econometric Society, vol. 72(2), pages 433-465, March.
    24. Smale, Steve, 1976. "A convergent process of price adjustment and global newton methods," Journal of Mathematical Economics, Elsevier, vol. 3(2), pages 107-120, July.
    25. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
    26. Oliver D. Hart, 1977. "On The Profitability of Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 91(4), pages 579-597.
    27. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 323-336.
    28. Dong-Hyun Ahn & Jacob Boudoukh & Matthew Richardson & Robert F. Whitelaw, 2002. "Partial Adjustment or Stale Prices? Implications from Stock Index and Futures Return Autocorrelations," Review of Financial Studies, Society for Financial Studies, pages 655-689.
    29. Edward C. Simmons, 1947. "The Position of the Treasury Bill in the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 55, pages 333-333.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:eme:jespps:v:43:y:2016:i:4:p:646-660 is not listed on IDEAS
    2. repec:ipg:wpaper:2014-462 is not listed on IDEAS

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ids:gbusec:v:8:y:2006:i:3/4:p:217-246. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Darren Simpson). General contact details of provider: http://www.inderscience.com/browse/index.php?journalID=168 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.