Financial Bubble
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A Financial Bubble is an economic bubble that occurs when the prices of financial assets rise significantly over a short period, to levels far above their intrinsic value (leading eventually to a market correction when the bubble bursts).
- Context:
- It can (typically) be caused by excessive speculation, market liquidity, changes in investor behavior, or excessive monetary easing by central banks.
- It can (often) result in significant financial losses for investors when the bubble bursts and prices revert to their intrinsic values.
- It can be identified retrospectively, as it is difficult for market participants to recognize them in real-time due to the general optimism and investment frenzy.
- It can have widespread economic effects beyond the financial markets, including recessions and financial crises, depending on the scale of the bubble and the asset classes involved.
- It can be fueled by a variety of factors including low-interest rates, technological innovations, or changes in regulatory environments.
- It can affect various asset classes, including stocks, real estate, commodities, and even cryptocurrencies.
- ...
- Example(s):
- Dot-Com Bubble, which occurred in the late 1990s due to excessive speculation in internet-based companies.
- Tulip Mania, one of the earliest documented financial bubbles, occurring in the 17th century in the Netherlands.
- Uranium Bubble of 2007, driven by speculation on uranium prices due to growing demand for nuclear power.
- 2000s United States Housing Bubble, fueled by low interest rates, easy credit conditions, and speculative real estate investments.
- Commodity Bubble, such as the Silver Thursday event in the 1980s or the more recent spikes in oil prices.
- Real Estate Bubble, exemplified by the Japanese asset price bubble in the 1980s or the 2000s United States housing bubble.
- Technology Bubble, like the Dot-Com Bubble of the late 1990s and early 2000s.
- Cryptocurrency Bubble, characterized by the rapid increase and subsequent fall in the prices of cryptocurrencies like Bitcoin and Ethereum.
- Patent Bubble, which can occur when there is speculative trading in patents or patent rights, leading to inflated valuations that do not reflect their true economic value.
- AI Bubble, with a speculative increase in the valuation and investment in AI companies.
- ...
- Counter-Example(s):
- Stable Value Funds, which are designed to provide stable returns and are less likely to experience bubbles.
- Value Investing, a strategy focused on investing in undervalued assets based on intrinsic value, often avoiding bubble-inflated assets.
- ...
- See: Fed Put, Asset Price, Intrinsic Theory of Value, Equities, Roaring Twenties, Commodities, Real Estate, Market Correction, Speculation, Market Liquidity.
References
2024
- (Wikipedia, 2024) ⇒ https://en.wikipedia.org/wiki/Economic_bubble Retrieved:2024-3-24.
- An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be caused by overly optimistic projections about the scale and sustainability of growth (e.g. dot-com bubble), and/or by the belief that intrinsic valuation is no longer relevant when making an investment (e.g. Tulip mania). They have appeared in most asset classes, including equities (e.g. Roaring Twenties), commodities (e.g. Uranium bubble), real estate (e.g. 2000s US housing bubble), and even esoteric assets (e.g. Cryptocurrency bubble). Bubbles usually form as a result of either excess liquidity in markets, and/or changed investor psychology. Large multi-asset bubbles (e.g. 1980s Japanese asset bubble and the 2020–21 Everything bubble), are attributed to central banking liquidity (e.g. overuse of the Fed put).
In the early stages of a bubble, many investors do not recognise the bubble for what it is. People notice the prices are going up and often think it is justified. Therefore bubbles are often conclusively identified only in retrospect, after the bubble has already popped and prices have crashed.
- An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be caused by overly optimistic projections about the scale and sustainability of growth (e.g. dot-com bubble), and/or by the belief that intrinsic valuation is no longer relevant when making an investment (e.g. Tulip mania). They have appeared in most asset classes, including equities (e.g. Roaring Twenties), commodities (e.g. Uranium bubble), real estate (e.g. 2000s US housing bubble), and even esoteric assets (e.g. Cryptocurrency bubble). Bubbles usually form as a result of either excess liquidity in markets, and/or changed investor psychology. Large multi-asset bubbles (e.g. 1980s Japanese asset bubble and the 2020–21 Everything bubble), are attributed to central banking liquidity (e.g. overuse of the Fed put).