Financial Market Bubbles and Crashes

Abstract

Despite the thousands of articles and the millions of times that the word 'bubble' has been used in the business press, there still does not appear to be a cohesive theory or persuasive empirical approach with which to study 'bubble' and 'crash' conditions. This book presents a plausible and accessible descriptive theory and empirical approach to the analysis of such financial market conditions. It advances such a framework through application of standard econometric methods to its central idea, which is that financial bubbles reflect urgent short side rationed demand. From this basic idea, an elasticity of variance concept is developed. It is further shown that a behavioral risk premium can probably be measured and related to the standard equity risk premium models in a way that is consistent with conventional theory.

Fraud and recessions: Views from fraudsters and fraud managers

“…Part of the difficulty is that recessions are often in part due to the way economic circumstances were dealt with, or were not dealt with. Moreover, events that cause a recession in one place or at one point in time will not necessarily have the same consequence in another (Vogel, 2010). What is clear, is that recessions are caused by a combination of factors which have different characteristics which impact in different ways.…”

Estimating Tipping Points in Feedback-Driven Financial Networks

“…Here we propose a network of bargaining agents and demonstrate how the degree of market overpricing through a feedback mechanism between trading and price dynamics induces further market overpricing, market bubbles, and utimately market collapse [27,28,29,25,26]. According to Scheinkman a bubble is a period in which prices exceed fundamental value.…”

“…Today bargaining is ubiquitous and ranges from haggling for food items in certain cultures to negotiations between large international business firms. [31,23,29] The bottom line in every market is the outcome of the bargaining process, e.g., market price. Although standard axiomatic bargaining theory idealizes the bargaining problem by assuming that individuals are highly rational as they negotiate their desires for various resources, panic and irrational behavior [25] do occur in real-world complex systems including political networks and financial markets.…”

Early Warning Indicator Model of Financial Developments Using an Ordered Logit

“…Moreover, Vogel (2010) presents a summary of the results of some studies regarding bubbles of the last three centuries. First, it seems that the availability of money and credit beyond what is needed to finance real GDP growth tends to stimulate speculative activity, which might end into an asset price bubble.…”

“…A bubble coincides with a period of euphoria while a crash is linked to fears. Hence, Vogel (2010) stresses the difference between booms and busts. Prechter (1999) states that hope tends to build slowly while fear often crystalizes swiftly.…”