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Speculative Bubbles and Overreaction to Technological Innovation

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Abstract

"Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street," observed legendary speculator Jesse Livermore. History tells us that periods of major technological innovation are typically accompanied by speculative bubbles as economic agents overreact to genuine advancements in productivity. Excessive run-ups in asset prices can have important consequences for the economy as firms and investors respond to the price signals, resulting in capital misallocation. On the one hand, speculation can magnify the volatility of economic and financial variables, thus harming the welfare of those who are averse to uncertainty and fluctuations. But on the other hand, speculation can increase investment in risky ventures, thus yielding benefits to a society that suffers from an underinvestment problem.

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  • Lansing, Kevin, 2009. "Speculative Bubbles and Overreaction to Technological Innovation," Journal of Financial Transformation, Capco Institute, vol. 26, pages 51-54.
    • Handle: RePEc:ris:jofitr:0826
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    1. Ricardo J. Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2006. "Speculative Growth: Hints from the U.S. Economy," American Economic Review, American Economic Association, vol. 96(4), pages 1159-1192, September.
    2. Martin S. Feldstein, 2007. "Housing, Credit Markets and the Business Cycle," NBER Working Papers 13471, National Bureau of Economic Research, Inc.
    3. Robert J. Gordon, 2003. "Hi-tech Innovation and Productivity Growth: Does Supply Create Its Own Demand?," NBER Working Papers 9437, National Bureau of Economic Research, Inc.
    4. Rhode,Paul W. & Toniolo,Gianni (ed.), 2006. "The Global Economy in the 1990s," Cambridge Books, Cambridge University Press, number 9780521617901.
    5. Eugene N. White, 2004. "Bubbles and Busts: The 1990s in the Mirror of the 1920s," FRU Working Papers 2004/09, University of Copenhagen. Department of Economics. Finance Research Unit.
    6. Charles E. Persons, 1930. "Credit Expansion, 1920 to 1929, and its Lessons," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 45(1), pages 94-130.
    7. Kevin J. Lansing, 2007. "Asset price bubbles," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct26.
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    1. Raurich, Xavier & Seegmuller, Thomas, 2019. "On the interplay between speculative bubbles and productive investment," European Economic Review, Elsevier, vol. 111(C), pages 400-420.
    2. Jong Kook Shin & Chetan Subramanian, 2019. "Asset Price Bubbles And Technological Innovation," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 482-497, January.

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    More about this item

    Keywords

    Speculative Bubbles; Excess Volatility; New Era Enthusiasm; Technology;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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