Asset bubbles: An introduction
An asset or economic bubble has so many other names too, such as a market bubble, a financial bubble, a speculative bubble, a price bubble, a balloon, or a speculative mania. It is a scenario where asset prices seem to be based on inconsistent or unconvincing future visibility.
It could also be alternatively visualized as trading in an asset at a tagged price or price range, which far outstrips the innate value of the asset. Although some economists refuse to accept that bubbles occur, those who are reasonably sure that asset prices sometimes deviate sharply from underlying worth, continue to disregard the causes of bubbles. Numerous explanations have been proposed, and new studies have disclosed that bubbles can show up even without uncertainty, speculation, or limited rationality wherein cases can be referred to as sunspot equilibria or non-speculative bubbles. In these circumstances, the bubbles can be justified as fair, where investors are justly repaid for the risk that higher returns might make the bubble burst at any stage. These strategies imply that the duration of the bubble disintegration can only be empirically predicted, and the bubble mechanism is often replicated using a Markov switching model. Similar theories suggest that bubbles may eventually be triggered by market synchronization cycles.
The latest hypotheses about the creation of asset bubbles indicate that these phenomena are behaviorally induced. Justifications have concentrated, for example, on evolving social standards and the role, that cultural-driven stories or narratives come into play in such events. So even though Inherent values are sometimes hard to monitor in real-life marketplaces, bubbles are often determined only in hindsight, once an abrupt price reduction has taken place. Such a drop is called a crash, or a burst of bubbles. Prices will fluctuate unpredictably in an economic bubble scenario and become challenging to forecast just from the angle of demand and supply.
Asset bubbles these days commonly termed as a common characteristic of modern economic gamut dating back to the 17th century B.C. The tulip frenzy in the mid-1630s of the Dutch Golden Age is also believed to be the maiden economic bubble reported.
Both the bubble booms well as the bust periods are indications of an affirmative feedback system as opposed to the negative assessment mechanism, which dictates the price of equilibrium under normal market situations.
Would you like to read more about this topic? This book might interest you: Asset Bubbles Explained.