Asset Price Bubbles - Theory And Empirical Research

This paper studies the asset price bubbles from both the theoretical and empirical perspectives, and analyzes the mechanism of bubble's formation, growth and burst, the factors that induce and enhance the bubble procedure, and the effective approaches of preventing bubbles and countermeasures when they do occur.Starting the research with bubble definition, this paper identifies two types of bubbles that are of much concern: the large and long-term deviation of prices from the fundamental values, and the price soaring not justified by the fundamentals. Both cases are disproof of market efficiency.The paper then makes a comprehensive study and appraisal of theories on rational speculative bubbles and irrational bubbles. Based on the research, this paper gives a hybrid positive feed back model that describes the startup, growing and the collapse of a bubble procedure, and analyzes how the procedure can be influenced by investors' psychology, market characteristics and government intervention.On the empirical studies, this paper summarizes all the available approaches of econometric tests on rational bubbles, and gives a list of speculative indicators that accompany bubbles, which can be a supplementary in detecting bubbles.The paper has done two empirical tests. The first work tests bubbles in the China stock market, and finds that rational speculative bubbles only existed in SSE (Shanghai Stock Exchange) before 1997, and there was a bubble procedure both in SSE and SZSE during 1999-2003. The second work is the econometric tests in Yen and Euro exchange rates. The results have shown inconsistency among different test approaches, and require prudential interpretation.Finally, the paper discusses how asset price bubbles can evolve into a bubble economy, and presents some approaches of how to prevent bubble and bubble economy and how to treat them when they really happen.