Economic bubble
As a speculative bubble, and the financial bubble, or blister (of English: speculative bubble, economic bubble, financial bubble) is in macroeconomics refers to a market situation in which the prices of one or more commodities (for example, raw materials or food), assets ( real estate and securities such as stocks or bonds) at high conversions above its intrinsic value (also: fundamental value or intrinsic value ) lie.
Markets are in the case of speculative bubbles, a recurring pattern of sharply rising on high volume and then collapsing prices to the stock market crash ( bubble -and- crash pattern ). This price movement pattern is not limited to the modern, highly interconnected financial markets, but for example, was documented already in the 17th and 18th century as a result of the tulip mania, the Mississippi Bubble and the South Sea Bubble.
With the increase of cross-linking of the international financial markets, these ( extreme ) price movements also increased the interest of science to the analysis of these phenomena, especially since be considered problematic for the entire economy. The market prices affect investment decisions of market participants and have a direct impact on the cost of capital of the company. As a result, extreme price movements as they are observed in bubble -and- crash patterns in the financial markets can spill over to the real economy and have a negative influence. This relationship is also called transfer effect: referred (English spillover effect).
Causes and development
Precondition for the emergence of a speculative bubble is a high availability of liquidity in the financial system. This can be triggered or exacerbated by an expansionary monetary policy and a weak fiscal policy. In the context of an expansionary monetary policy, the central bank will lower interest rates and thus the entire interest level of the currency area. Investors tend in such a phase to not save money, but to invest in other asset classes such as real estate or stocks, which promise a higher return. Low interest rates favor the levers of such investments, in which a portion of the investment amount is not funded from equity but through loans.
The reasons for the emergence and bursting of speculative bubbles are not clear and subject of controversial discussions in economics. In the context of models based on the efficient market hypothesis and the theory of rational expectations, asset bubbles can not be explained, since, if market participants have full information and act rationally, the market basically strives for a balance. According to the theory, the price of an asset equal to the present value of expected future cash flows. Markets are efficient and therefore in equilibrium when prices change only by changing expectations of future cash flows based on new information. In the near term over ratings occur, but recognized by some market participants and by appropriate action would be terminated (for example, short sale ). This led to the assumption that asset bubbles would be evidence of lack of market efficiency, irrational behavior of market players as well as high uncertainty on real markets.
For the formation of bubbles following possible causes are discussed in the literature.
Bounded rationality
In behavioral economics is the market participants subject to bounded rationality. This assumption leads to the hypothesis that cognitive difficulties in the application of theoretical pricing models lead to short-term mispricing and thus bubbles. As a result, the errors would be minimized by learning effects and the market prices would be close to its inner value.
Greater Fool
The Greater Fool hypothesis (English for greater fool ) assumes that someone in the market is always willing to pay an even higher price. If an individual investor has already paid so knowingly a price above the intrinsic value, he assumes that he can sell the investment at an even higher price, so he found an even bigger fool. To create a cumulative effect, so a longer-term continuation of this mechanism, must among investors overestimate their own ability to evaluate investment objects correctly, be implied. The investors overestimate the result, the number of those who are willing to pay even higher prices. If no one is willing to accept these inflated prices, it comes According to the hypothesis of a price correction. The systematic overestimation of their own abilities is in social psychology as self-esteem relevant distortion (English: self-serving bias) refers.
Institutionalization
In the social science literature institutionalization is called the binding of individual behavior to social norms. Individual investors do not rely here on their own perception, but are based at least partially on their environment and follow the behavior of others ( herd behavior ). This must not be changed from committed or agreed rules ( for example, the legal system as ), but may arise spontaneously and sustained over a long period, even if this behavior is irrational.
Speculation
Speculative behavior draws its motivation from the pursuit of a (financial) gain. The prices on the market form from these expectations. Speculative trading participants believe that do not behave rationally all market participants and a subsequent gain is independent of the intrinsic value. It is convenient to place a bet on rising prices.
Experimental markets
Experimental markets are model studies, the basis of which the possible causes for the emergence and bursting of speculative bubbles in the laboratory getest. In the literature, 1988 published under the title Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets study by Smith, Suchanek and Williams cited as a groundbreaking and essential for subsequent experimental studies. The aim is to investigate which parameters and conditions have an effect on the formation of bubbles. What varies among other things, the qualifications and the composition of the participants, the dividend structure, the market mechanisms that provide information to market participants available, the monetary incentives and the number and type of markets that operate simultaneously or sequentially. In most cases, creates air bubbles, and clear reasons for this could not be identified so far. The parameter with the greatest potential to prevent speculative bubbles, the frequency of dividend payment, the process for determining the fundamental value and the experience of market participants are called.