Original article Financial Economics

Price bubbles and financial markets efficiency

Doncho Donev - Eurobank Bulgaria
Received: 08 Jun 2022
Revised:
Published:
Downloads: 0
Citations: 0
Issue 1/2017
JEL G120 G170
DOI https://doi.org/10.56497/etj1762106

Abstract

This article
presents the development of investment theories after the age of the prevailing Modern Portfolio Theory and Capital Asset Pricing Model. It starts with a review of the main theoretical and empirical presumptions of the Efficient Market Hypothesis. The emergence of behavioral finance is monitored, focusing on its contribution to the investment theory and practice. A special attention is paid on the speculative price bubbles. The paper reveals the prerequisites for their emergence, the phases through which a typical price bubble passes, and the methods for calculation of the probability for their collapse. The securities with an infinite maturity are highlighted. An example for a price bubble on the Bulgarian Stock Exchange is investigated in details. Therefore the historical performance of the main Sofix stock index is examined.

References

Bewley, T. (1980). The Optimum Quantity of Money. - In: Kareken, J. and N. Wallace (eds.). Models of Monetary Economics. Minneapolis, Minnesota: Federal Reserve Bank.

Black, F. (1986). Noise. - Journal of Finance, Vol. 41, N 3, July.

Blanchard, O. J., M. W. Watson (1982). Bubbles, Rational Expectations and Financial Markets. - NBER Working Paper N 945, July.

Brock, W. A. (1979). An Integration of Stochastic Growth Theory and the Theory of Finance - part I: The Growth Model. - In: Green, J., J. Scheikman (eds.). General Equilibrium, Growth and Trade. New York: Academic Press.

Brock, W. A. (1982). Asset Prices in a Production Economy. - In: McCall, J. J. (ed.). The Economics of Information and Uncertainty. Chicago: The University of Chicago Press.

Das, S., H. Markowitz, J. Scheid, and M. Statman (2010). Portfolio Optimization with Mental Accounts. - Journal of Financial and Quantitative Analysis, Vol. 45, N 2, April.

Diba, B. T., H. I. Grossman (1988). The Theory of Rational Bubbles in Stock Prices. - The Economic Journal, Vol. 98, N 392, Septebmer.

Fama, E. F. (1965). The Behavior of Stock-Market Prices. - The Journal of Business, Vol. 38, N 1, January.

Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. - The Journal of Finance, Vol. 25, N 2, May.

Friedman, M. (1953). The Methodology of Positive Economics. - In: Essays in Positive Economics. University of Chicago Press.

Friedman, M., L. J. Savage (1948). The Utility Analysis of Choices Involving Risk. - Journal of Political Economy, Vol. 56, N 4, August.

Garber, P. M. (1990). Famous First Bubbles. - The Journal of Economic Perspectives, Vol. 4, N 1, Spring.

Graham, B., D. L. Dodd (1934). Security Analysis. The McGraw-Hill Companies, Inc.

Harrison, J. M., D. M. Kreps (1978). Speculative Investor Behavior in a Stock

Market with Heterogeneous Expectations. - The Quarterly Journal of Economics, Vol. 92, N 2, May.

Kahneman, D., A. Tversky (1979). Prospect Theory: An Analysis of Decision under Risk. – Econometrica, Vol. 47, N 2, March.

Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Palgrave Macmillan.

Kindleberger, Ch. P., R. Z. Aliber (2011). Manias, Panics and Crashes: A History of Financial Crises (6th ed.). Palgrave Macmilllan.

LeRoy, St. F., R. D. Porter (1981). The Present-Value Relation: Tests Based on Implied Variance Bounds. - Econometrica, Vol. 49, N 3, May.

Mandelbrot, B. B. (1966). Forecats of Future  Prices, Unbiased  Markets, and ‘Martingale’ Models. – Journal of Busines, University of Chicago Press, Vol. 39.

Minsky, H. P. (1992). The Financial Instability Hypothesis. The Jerome Levy Economics Institute of Bard College. Working Paper N 74, May.

Morris, St., A. Postlewaite, H. S. Shin (1995). Depth of knowledge and the Effect of Higher Order Uncertainty. - Economic Theory, Vol. 6, N 3, October.

Samuelson, P. A. (1958). An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money. - The Journal of Political Economy, Vol. 66, N 6, December.

Samuelson, P. A. (1965). Proof that Properly Anticipated Prices Fluctuate Randomly. - Industrial Management Review, Vol. 6, N 2, Spring.

Santos, M. S., M. Woodford (1997). Rational Asset Pricing Bubbles. - Econometrica, Vol. 65, N 1, January.

Scheinkman, J. A., Bl. LeBaron (1989). Nonlinear Dynamics and Stock Returns. - The Journal of Business, Vol. 62, N 3, July.

Shefrin, H., M. Statman (1985). The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence. - The Journal of Finance, Vol. 40, N 3, July.

Shefrin, H., M. Statman (2000). Behavioral Portfolio Theory. - Journal of Financial and Quantitative Analysis, Vol. 35, N 2, June.

Shiller, R. J. (1989). Comovements in Stock Prices and Comovements in Dividends. - Journal of Finance, Vol. 44, N 3, July.

Shiller, R. J. (2000). Irrational Exuberance. Princeton University Press.

Shleifer, A., R. W. Vishny (1997). The Limits of Arbitrage. - The Journal of Finance, Vol. 52, N 1, March.

Soros, G. (2008). Reflexivity in Financial Markets. - The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means (1st ed.). Public Affairs.

Tirole, J. (1985). Asset Bubbles and Overlapping Generations. – Econometrica, Vol. 53, N 6, November.

How to publish

Are you an author? Please read our publishing terms first.

Learn