Speculative bubbles (manias) from historical point of view. Why do bubbles arise? Bubbles from academic point of view
The stock market history since ages has been abundant in spikes in asset values within commodity, a particular industry, or asset class. The phenomenon is called “speculative bubbles” or “manias”.
A mania is usually caused by unjustified and exaggerated expectations of future growth and price appreciation. It begins with little knowledge about a factor and unbelief dominate. With gradually more and more investors joining, prices go higher. In the last phase of bubble prices go beyond what an objective analysis of intrinsic value would suggest. Finally the bubble bursts and prices fall back down to normalized levels. This process involves a long period of steep decline in price whereas which most investors panic and sell out of their investments. Wikipedia presents the theory forming bubbles from behavioristic point of view:
Theory attributes market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets.[1]
Some aspects of bubbles gives Charles Kindelberg in his book “Anatomy of a Financial Crisis”. He maintains that a boom is often fed by the characteristic of the financial market that could be named “high-powered money”. It is an expansion of bank credit that increases the total money supply - and is the derivative of increased demand for goods or the supply of existing financial assets. The mechanism is as follows:
Prices increase, giving rise to new profit opportunities and attracting still further firms and investors. Positive feedback develops, as new investment leads to increases in income that stimulate further investment and further income increases. (…) Overestimation of profits comes from euphoria, affects firms engaged in the production and distributive processes, and requires no explanation. (…) The word mania emphasizes the irrationality; bubble foreshadows the bursting.[2]
In the end the bubble is bursting. This mechanism is also explained by Kindelberg:
At some stage, a few insiders decide to take their profits and sell out. At the top of the market there is hesitation, as new recruits to speculation are balanced by insiders who withdraw. Prices begin to level off. (…) As distress persists, speculators realize, gradually or suddenly, that the market cannot go higher. It is time to withdraw. The race out of real or long-term financial assets and into money may turn into a stampede.[3]
Sometimes specific signal appears that precipitates the crisis. It may be the failure of a bank or company, the revelation of a swindle of a person connected with a particular company or a fall in the price of the object of speculation. Kindelberg describes this situation as follows:
In any case, the rush is on. Prices decline. Bankruptcies increase. Liquidation sometimes is orderly but may degenerate into panic as the realization spreads that there is only so much money, not enough to enable everyone to sell out at the top.[4]
As far as the stock market is concerned, it is especially prone to bubbles. They happened many times in the stock market history – both contemporarily and in the past. In our modern financial markets, speculators can often make profitable bets when speculative bubbles burst by purchasing derivatives that bring profits along with falling prices.
Brak komentarzy:
Prześlij komentarz