8. Market Bubbles

Question 1

What are the 5 components of the empirical definition of a bubble

Answer 1

1. Price rise and fall
2. media attention, positive news
3. high trading volume
4. positive expectations
5. sophisticated investors ride the bubble early

Question 2

Explain the two key features of a market bubble

Answer 2

1. Extrapolative beliefs: Weighted average of past price puts more weight on the more recent prices (higher growth)
2. investor overconfidence: momentum, excessive trading volume, increased speculation