An Anatomy of Stock Market Bubbles

Qun ZHANG, Baiyi WU

Abstract


With the ups and downs of the international financial markets, it is necessary to deepen the understanding of the stock market bubbles. This study does an anatomy of stock market bubbles from different aspects. First, the definitions are roughly bunched into two categories --- the so-called conditional and comparative definitions are mainly based on a deviation from a fundamental value, while the statistical and structural definitions are based on the existence of a strong change of regime. Associated with the review of mechanisms for fueling stock market bubbles, it further presents the varying theoretical models, as well as the detection and prediction methodologies. Finally, three main directions for interdisciplinary and collaborative researches are proposed.

Keywords


Bubbles; Stock market; Positive feedback; Super-exponential price

Full Text:

PDF

References


Abreu, D., & Brunnermeier, M. K. (2003). Bubbles and crashes. Econometrica, 71(1), 173-204.

Allen, F., Morris, S., & Postlewaite, A. (1993). Finite bubbles with short sale constraints and asymmetric information. Journal of Economic Theory, 61(2), 206-229.

Anufriev, M., & Panchenko, V. (2009). Asset prices, traders’ behavior and market design. Journal of Economic Dynamics and Control, 33(5), 1073-1090.

Asness, C. S. (2014). My top 10 peeves. Financial Analysts Journal, 70(1), 22-30.

Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the Economics of Finance, 1, 1053-1128.

Barlevy, G. (2007), Economic theory and asset bubbles. Economic Perspectives, (Q III), 44-59.

Battiston, S., Farmer, J. D., Flache, A., Garlaschelli, D., Haldane, A. G., Heesterbeek, H., Hommes, C., Jaeger, C., May, R., & Scheffer, M. (2016). Complexity theory and financial regulation. Science, 351(6275), 818-819.

Bhattacharya, U., & Yu, X. (2008). The causes and consequences of recent financial market bubbles: An introduction. Review of Financial Studies, 21(1), 3-10.

Blanchard, O. J., & Watson, M. W. (1982). Bubbles, rational expectations and financial markets. In P. Wachtel (Ed.), Crises in the Economic and Financial Structure. Lexington, MA.

Bouchaud, J. P., & Cont, R. (1998). A Langevin approach to stock market fluctuations and crashes. European Physical Journal B-Condensed Matter and Complex Systems, 6(4), 543-550.

Brock, W. A., & Hommes, C. H. (1997). A rational route to randomness. Econometrica, 65(5), 1059-1095.

Brock, W. A., & Hommes, C. H. (1998). Heterogeneous beliefs and routes to chaos in a simple asset pricing model. Journal of Economic Dynamics and Control, 22(8-9), 1235-1274.

Brunnermeier, M. K. (2008). Bubbles. In Steven N. Durlauf and Lawrence E. Blume (Eds.), The New Palgrave Dictionary of Economics. Macmillan (2nd ed).

Brunnermeier, M. K. (2009), Deciphering the 2007-08 liquidity and credit crunch. Journal of Economic Perspectives, 23, 77-100.

Brunnermeier, M. K., & Oehmke, M. (2013). Bubbles, financial crises, and systemic risk. In Handbook of the Economics of Finance, 2, 1221-1288.

Challet, D., & Zhang, Y. C. (1997). Emergence of cooperation and organization in an evolutionary game. Physica A: Statistical Mechanics and its Applications, 246(3-4), 407-418.

Chen, S. H., Chang, C. L., & Du, Y. R. (2012). Agent-based economic models and econometrics. Knowledge Engineering Review, 27(2), 187-219.

Chiarella, C., & He, X. Z. (2003). Heterogeneous beliefs, risk, and learning in a simple asset-pricing model with a market maker. Macroeconomic Dynamics, 7(4), 503-536.

Corsi, F., & Sornette, D. (2014). Follow the money: The monetary roots of bubbles and crashes. International Review of Financial Analysis, 32, 47-59.

Daniel, K., Hirshleifer, D., & Subrahmanyam, A. (1998). Investor psychology and security market under- and overreactions. Journal of Finance, 53(6), 1839-1885.

De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98(4), 703-738.

De Marzo, P. M., Kaniel, R., & Kremer, I. (2008). Review of Financial Studies, 21(1), 19-50.

De Oliveira, J. F. L., & Ludermir, T. B. (2016). A hybrid evolutionary decomposition system for time series forecasting. Neurocomputing, 180, 27-34.

Diamond, P. A. (1965). National debt in a neoclassical growth model. American Economic Review, 55(5), 1126-1150.

Diba, B. T., & Grossman, H. I. (1988a). The theory of rational bubbles in stock prices. Economic Journal, 98(392), 746-754.

Diba, B. T., & Grossman, H. I. (1988b). Explosive rational bubbles in stock prices?. American Economic Review, 78(3), 520-530.

Evans, G. W., (1991), Pitfalls in testing for explosive bubbles in asset prices. American Economic Review, 81, 922-930.

Fievet, L., Sornette, D. (2018). Calibrating emergent phenomena in stock markets with agent based models. PLoS ONE, 13(3), e0193290.

Froot, K. A., & Obstfeld, M. (1991). Intrinsic bubbles: The case of stock prices. American Economic Review, 81(5), 1189-1214.

Garber, P. M. (2001). Famous first bubbles: The fundamentals of early manias. MIT Press.

Gervais, S., & Odean, T. (2001). Learning to be overconfident. Review of Financial Studies, 14(1), 1-27.

Greenwood, R., & Nagel, S. (2009). Inexperienced investors and bubbles. Journal of Financial Economics, 93(2), 239-258.

Harrison, J. M., & Kreps, D. M. (1978). Speculative investor behavior in a stock market with heterogeneous expectations. Quarterly Journal of Economics, 92(2), 323-336.

Homm, U., & Breitung, J. (2012). Testing for speculative bubbles in stock markets: A comparison of alternative methods. Journal of Financial Econometrics, 10(1), 198-231.

Hong, H., & Stein, J. C. (2003). Differences of opinion, short-sales constraints, and market crashes. Review of Financial Studies, 16(2), 487-525.

Huang, J. P. (2015). Experimental econophysics: Complexity, self-organization, and emergent properties. Physics Reports, 564, 1-55.

Hüsler, A., Sornette, D., & Hommes, C. H. (2013). Super-exponential bubbles in lab experiments: Evidence for anchoring over-optimistic expectations on price. Journal of Economic Behavior and Organization, 92, 304-316.

Jarrow, R. A., Protter, P., & Shimbo, K. (2010). Asset price bubbles in incomplete markets. Mathematical Finance, 20(2), 145-185.

Jarrow, R., Kchia, Y., & Protter, P. (2011). How to detect an asset bubble. SIAM Journal on Financial Mathematics, 2(1), 839-865.

Jiang, Z. Q., Zhou, W. X., Sornette, D., Woodard, R., Bastiaensen, K., & Cauwels, P. (2010). Bubble diagnosis and prediction of the 2005–2007 and 2008–2009 Chinese stock market bubbles. Journal of Economic Behavior and Organization, 74(3), 149-162.

Johansen, A., & Sornette, D. (1999). Critical crashes. Risk, 12, 91-94.

Johansen, A., Sornette, D., & Ledoit, O. (1999). Predicting financial crashes using discrete scale invariance. Journal of Risk, 1(4), 5-32.

Jordà, Ò., Schularick, M., & Taylor, A. M. (2015). Leveraged bubbles. Journal of Monetary Economics, 76, S1-S20.

Kaizoji, T., & Sornette, D. (2010). Market bubbles and crashes. Encyclopedia of Quantitative Finance, 3, 144-156.

Kindleberger, C. P., & Aliber, R. Z. (2011). Manias, panics and crashes: A history of financial crises. Palgrave Macmillan (6th ed).

Koutmos, G., & Saidi, R. (2001). Positive feedback trading in emerging capital markets. Applied Financial Economics, 11(3), 291-297.

LeCun, Y., Bengio, Y., & Hinton, G. (2015). Deep learning. Nature, 521(7553), 436.

Leiss, M., Nax, H. H., & Sornette, D. (2015). Super-exponential growth expectations and the global financial crisis. Journal of Economic Dynamics and Control, 55, 1-13.

LeRoy, S. F., & Porter, R. D. (1981). The present-value relation: Tests based on implied variance bounds. Econometrica, 49(3), 555-574.

Miao, J., Wang, P., & Xu, Z. (2015). A bayesian dynamic stochastic general equilibrium model of stock market bubbles and business cycles. Quantitative Economics, 6(3), 599-635.

Michaelides, P. G., Tsionas, E. G., & Konstantakis, K. N. (2016). Non-linearities in financial bubbles: Theory and Bayesian evidence from S&P500. Journal of Financial Stability, 24, 61-70.

Minsky, H. P. (1993). The financial instability hypothesis. In P. Arestis, and M. C. Sawyer (Eds.), Handbook of Radical Political Economy.

Orléan, A. (1995). Bayesian interactions and collective dynamics of opinion: Herd behavior and mimetic contagion. Journal of Economic Behavior and Organization, 28(2), 257-274.

Perez, C. (2009). The double bubble at the turn of the century: Technological roots and structural implications. Cambridge Journal of Economics, 33(4), 779-805.

Phillips, P. C. B., Wu, Y., & Yu, J. (2011). Explosive behavior in the 1990s Nasdaq: When did exuberance escalate asset values?. International Economic Review, 52(1), 201-226.

Phillips, P. C. B., Shi, S., & Yu, J. (2015). Testing for multiple bubbles: Historical episodes of exuberance and collapse in the S&P 500. International Economic Review, 56(4), 1043-1078.

Protter, P. (2013). A mathematical theory of financial bubbles. In Paris-Princeton Lectures on Mathematical Finance, 1-108.

Samuelson, P. A. (1958). An exact consumption-loan model of interest with or without the social contrivance of money. Journal of Political Economy, 66(6), 467-482.

Schatz, M., & Sornette, D. (2018). Inefficient bubbles and efficient drawdowns in financial markets. Swiss Finance Institute Research Paper, (18-49).

Scherbina, A., & Schlusche, B. (2014). Asset price bubbles: A survey. Quantitative Finance, 14(4), 589-604.

Scheinkman, J. A., & Xiong, W. (2003). Overconfidence and speculative bubbles. Journal of Political Economy, 111(6), 1183-1220.

Shiller, R. J. (1981). Do stock prices move too much to be justified by subsequent changes in dividends?. American Economic Review, 71(3), 421-436.

Shiller, R.J. (2009). Irrational exuberance. Princeton University Press (2nd ed.).

Smith, V. L., Suchanek, G. L., & Williams, A. W. (1988). Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica, 56(5), 1119-1151.

Sohn, H., & Sornette, D. (2017). Bubbles as violations of efficient time-scales. Institute for New Economic Thinking Working Paper Series, (65).

Sornette, D. (2017). Why stock markets crash: Critical events in complex financial systems. Princeton University Press.

Sornette, D., & Cauwels, P. (2015). Financial bubbles: Mechanisms and diagnostics. Review of Behavioral Economics, 2(3), 279-305.

Sornette, D., Cauwels, P., & Smilyanov, G. (2018). Can we use volatility to diagnose financial bubbles? Lessons from 40 historical bubbles. Quantitative Finance and Economics, 2(1), 486-594.

Sunder, S. (1995). Experimental asset markets. In J. H. Kagel, A. E. Roth (Eds.), Handbook of Experimental Economics (pp.445-500). Princeton University Press.

Stiglitz, J. E. (1990). Symposium on bubbles. Journal of Economic Perspectives, 4(2), 13-18.

Taipalus, K. (2012). Detecting asset price bubbles with time-series methods. Scientific Monograph E 47, Helsinski.

Temin, P., & Voth, H. J. (2004). Riding the south sea bubble. American Economic Review, 94(5), 1654-1668.

Tirole, J. (1985). Asset bubbles and overlapping generations. Econometrica, 53(6), 1499-1528.

Van Norden, S. (1996). Regime switching as a test for exchange rate bubbles. Journal of Applied Econometrics, 11(3), 219-251.

Van Norden, S., & Vigfusson, R. (1998). Avoiding the pitfalls: Can regime-switching tests reliably detect bubbles?. Studies in Nonlinear Dynamics and Econometrics, 3(1), 1-22.

Vogel, H. L., & Werner, R. A. (2015). An analytical review of volatility metrics for bubbles and crashes. International Review of Financial Analysis, 38, 15-28.

Weil, P., 1987, Confidence and the real value of money, Quarterly Journal of Economics, 102, 1-22.

West, K. D. (1987). A specification test for speculative bubbles. Quarterly Journal of Economics, 102(3), 553-580.

Wu, Y. (1997). Rational bubbles in the stock market: Accounting for the US stock-price volatility. Economic Inquiry, 35(2), 309.

Xiong, W. (2003). Bubbles, crises, and heterogeneous beliefs. In J.-P. Fouque & J. Langsam (Eds.), Handbook on Systemic Risk (Chapter 24, pp.663-713). Cambridge University Press.




DOI: http://dx.doi.org/10.3968/10513

Refbacks

  • There are currently no refbacks.


Copyright (c) 2018 Canadian Social Science

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Reminder

  • How to do online submission to another Journal?
  • If you have already registered in Journal A, then how can you submit another article to Journal B? It takes two steps to make it happen:

Submission Guidelines for Canadian Social Science

We are currently accepting submissions via email only. The registration and online submission functions have been disabled.

Please send your manuscripts to css@cscanada.net，or css@cscanada.org for consideration. We look forward to receiving your work.

 Articles published in Canadian Social Science are licensed under Creative Commons Attribution 4.0 (CC-BY).

 

Canadian Social Science Editorial Office

Address: 1020 Bouvier Street, Suite 400, Quebec City, Quebec, G2K 0K9, Canada.
Telephone: 1-514-558 6138 
Website: Http://www.cscanada.net; Http://www.cscanada.org 
E-mail:caooc@hotmail.com; office@cscanada.net

Copyright © Canadian Academy of Oriental and Occidental Culture