Why do some technologies lead to speculation while others do not? Why were there speculative bubbles in stocks of early radio producers and broadcasters, “aeroplane” manufacturers and airlines, internet storefronts, electronics producers, electric automobile manufacturers, and transcontinental railroads, but not in the stocks of producers of lasers, northeastern railroads, antibiotics, nylon, rayon, cellophane, or televisions? Our proposed work aims to rectify an important methodological flaw in current studies of speculative crises: one cannot identify the causes of bubbles by examining a single case, nor can one identify bubbles based on an analysis of bubbles throughout history. Instead, one must look at cases where there were, and were not bubbles. Identifying causal factors requires (i) a sampling strategy that encompasses episodes of financial euphoria and periods of relative calm and (ii) the identification of assets that are at similar risk of sparking such speculative episodes. In this paper, we develop an inventory of technological innovations that ex post were revealed to be of substantial economic importance. Our initial findings are that bubbles appear under four important conditions. First, consistent with prior research (see esp. Kindleberger, 2005), there must be easy access to credit. Bubbles are rare when interest rates are high. Second, as argued extensively in the financial economics and the economics literature generally, assets that serve as foci of speculative behavior possess high levels of commercial and technological uncertainty (cf., Baker & Wurgler, 2007). The results we observe are consistent with the theoretical finding that uncertain opportunities may warrant high prices due to their high opt... ... middle of paper ... ...ar press, or through existing historical accounts. Through our pilot study, we have demonstrated variance in the formation of asset bubbles surrounding the introduction of significant new technologies. While we find general support for our predictions, the current stage of this work is rudimentary: much work is left to be done. In addition to contributing to an important stream of research, this research has broad implications for public and private policy makers. The pervasive influence of asset bubbles on resource allocation suggests the need for increased understanding of the causes of these episodes. While entrepreneurs and investors may wish to exploit this knowledge to more effectively mobilize capital in support of innovation, regulators and other public authorities need to understand and monitor the mechanisms that can lead to destructive financial events.
It made benchmark interest rate remains low. Then the excess liquidity made the asset bubble. Finally, the burst of asset bubble thumped the financial system. (Pierpaolo,B and Woodford,M, 2003)
Speculation does not take place in a vacuum and therefore must come from somewhere. Galbraith points to the flow of gold into the United States from 1925 on and the subsequent reduction in the Federal Reserve rediscount rate as the first step. He immediately points out that available funds will not by itself lead to speculation. This is a fair assumption given that people with a substantial amount of savings or income are not always going to plunge into the market in order to double their money. In fact, Galbraith notes that the majority of people during this time did not have substantial savings or high incomes. The author also points out the lack of distribution of wealth as an underlying cause of the crash because the economy was dependent on the financial contributi...
There were many factors that triggered the financial crisis in 2008, with one of the main ca...
Despite the increase in volatility, the NASDAQ Composite Index is up by 15.4% for 2007 and by 28% since the last MoneySoft M&A Outlook was published. During the same period, the Dow Jones Industrial Average has moved from 10,705 to 13,930—an increase of 30%, but the market is “wobbly.”
The world 's central banks face increasing problems when it comes to planning fiscal policies in today 's climate of financial uncertainties, lower gross domestic production levels, or GDPs, and artificially high bubbles that seem to be artificially upholding inflated stock values. Davidstockmanscontracorner.com recently published a report that examines these issues based on more than 30 years of Bubble Finance policies at the U.S. Federal Reserve Bank and similar pie-in-the-sky analyses of the the Bubble Finance policies of other central banks worldwide. Ever-increasing global debt, bigger government and economic interconnectedness have pushed many governments to the brink of bankruptcy. For example, according to the report, Japan has lost 272,000 of its population while delivering 48 percent yields on 40-year bonds in the first half of 2016.
Garber, Peter M. “Famous First Bubbles.” Journal of Economic Perspectives 4.2 (1990): 35-50. Historical Abstracts.
With this new influx of technology in the market, trading is being done at such a rapid rate that companies can’t keep up with the changing times. Therefore one day, a company could have millions of dollars worth of investors and the next day have only thousands. Money is being moved at such a rapid rate that the Dow is changing at higher percentiles than have ever been seen
The easy availability of credit in U.S, Russian debt crises and Asian financial crises of late 90’s showed the way to a housing construction boom in the USA. The relaxed lending rules and increasing property prices along with the increase in foreign funds added to generate this real estate bubble.
... shock waves through the world’s financial markets. We more quickly hear and react to financial news, whether good or bad.
preceded by the movement of banks into a new business line and asset bubbles. Due to these
Things don’t always work as they should on Wall Street. However, financial markets send signals about the future of the economy. Markets can move in advance of what is known to the general public. In a broad view, markets seemingly anticipate political events. In other times, the markets will anticipate economic events long before the investing public understands what’s going on in the general economy. The market is also good at discounting a transformational event. When the market more than anticipates all future revenues and all the future profits that would accrue to the new phenomena, a bubble or mania develops. The most interesting part of the mania is the repetitive nature of the phenomenon
The stock market plays a significant role in the health of the economy; the economy has to be strong for a country and its citizens to prosper. In 1929 over a period of two weeks 30 billion dollars disappeared from the U.S. economy, this was the event that started the greatest period of human hardship of the twentieth century known as the great depression. On October 19,1987 the Dow Jones industrial average plunged almost a third of its value. Many investors went completely bankrupt after one day of trading. Both of these crashes came without warning in booming markets are the currently booming markets heading for a collapse? The current market resembles both 1929 and1987 markets but there is a smaller possibility for collapse.
] This catastrophic event is caused by the accumulation of a large scale of speculation by not only investors but also banks and institutions in the stock market. Though the unemployment rate was climbing during the 1920s and economy was not looking good, people on Wall Street were not affected by the depressing news. The optimism spread from Wall Street to small investors and they were investing with the money they don’t have, which is investing on margin as high as 90%. When the speculative bubble burst, people lost everything including houses and pensions. The main reason ...
The crashing stock market became a key contributor to this crisis. With World War I coming to a close, a new generation formed in the United States. It was filled with enthusiasm, confidence, and optimism. Anything seemed possible with inventions like the airplane being developed. Prohibition renewed confidence in the productivity of the common man. It is because of this heightened optimism that people took their savings out of banks and began investing it in the stock market (Rosenburg). This confidence in the stock market caused a sudden boom.
According to Perold (2004), ‘CAPM can be served as a benchmark for understanding the capital market phenomena that cause asset prices and investor behavior to deviate from the prescript...