Asset Price Bubbles

Introduction

Asset price bubbles were studied by many scientists and their researches have shown that asset prices are often characterized by bubbles. The purpose of this literature review is to study bubbles in time and show how they arose historically on different markets, what was the trigger to their development and what were the consequences of them.

Talking about asset price bubbles, we would in the first instance describe speculative ones. They are the bubbles, "where a stock is traded at prices significantly higher than ( and seemingly unrelated to) the fundamental value of stock, are closely related to traders` (optimistic) expectations about the future price of the stock." It is a rather usual case when traders buy such stocks with the hope the price will rise much more and will help them to gain extraordinary profits.

Bubbles are also socio-political-cultural phenomena, with intense and accelerating interactions of engineered hype and feverish expectations (Compton and Ozler, 2011; Turcan, 2011).

This paper is structured in a way to describe bubbles from different points of views and aspects. First of all, there is some brief information about the largest bubbles which occured in time and then a special classification is mentioned.

But the thing we need the most, is the reasons bubbles arise which will be studied in the most careful and complete way. Moreover, some models which help to identified bubbles will be used in this work. The last but not the least part of the paper is the effects of bubbles burst and how they influence the economy.

Such study will lead to greater understanding of bubbles and their nature and is going to help us to figure out what a crucial impact they may have on economy and whether they are good or bad for it.

Different asset price bubbles in our history

The first known asset price bubbles in our history are the following ones: Dutch Tulipmania (1634–1637) when prices for tulip bulbs reached extremely high levels...