What are Asset Price Bubbles? A Survey on Definitions of Financial Bubbles

Title data

Baumann, Michael Heinrich ; Janischewski, Anja:
What are Asset Price Bubbles? A Survey on Definitions of Financial Bubbles.
2021
Event: AMASES Annual Conference 2021 , September 13-18, 2021 , Department of Law, Economics and Human Sciences (DIGIES) of the University of Reggio Calabria / online.
(Conference item: Conference , Speech )

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Financial market bubbles and crashes have caused large economic damages, e.g., the 2008 financial crisis but also the Black Thursday in 1929. However, precise definitions of what are asset price bubbles are difficult and ambiguous across different application areas. We contribute by providing a systematic overview of definitions of asset price bubbles sorted by application areas and evaluate the real-time applicability of the definitions. A main distinction is made between definitions that use fundamental values and definitions that refer to price changes over time (Kindleberger, 1978). Since many economists prefer to define bubble prices as deviations from fundamental values, the specification of fundamental value is needed: First, the fundamental value can be taken as the sum of all discounted expected future dividends (up to a resale time plus the expected resale value) or retrospectively the sum of realized discounted dividends. Or as the total assets (balance sheet or resale value) divided by the number of shares. Note that traders do not have homogeneous believes about future dividend payments (cf. Barlevy, 2007). Second, expected future cash flows do not necessary match with the actually paid dividends when looking back at historical data (cf. Siegel 2003). Third, there are assets that do not pay monetary dividends. Moreover, there is the question of whether money/gold/cryptocurrencies are bubbles (Townsend, 1980). Fourth, if a price is above its fundamental value, this does not mean that it will necessarily fall. But there is also no reason for it not to do so (cf. Barlevy, 2007). This idea is followed up in stochastic analysis (Protter, 2016). If one defines prices as stochastic processes, it is no longer just a price path that is a bubble, but the whole process. That is, it is assumed that the "bubble property" is inherent in the whole dynamic, whether or not "bubble dynamics" are actually observed in a realization of the process.