(855) 4-ESSAYS

Type a new keyword(s) and press Enter to search

Economic Price Bubbles


            What do economists mean by the term "asset price bubble"? Are efficient markets prone to asset price bubbles? What methods have economists and real estate analysts used to determine the presence of housing bubbles and what are the shortcomings of those methods?.
             It would seem that economists define the term "asset price bubble" in a number of ways to varying degrees of success. Evanoff et al. define a bubble existing "when the market price of an asset exceeds its price determined by fundamental factors by a significant amount for a prolonged period".1 This definition although seemingly certain is very vague in it's nature. It begs the questions, how long is a prolonged period, by how much is the asset's fundamental value exceeded? In their defense however, in the summing up section of their paper it is stated, "we still do not have a definition of an asset bubble". Schiller in his paper suggests, "Economists define a bubble as a rise in price that cannot be explained by fundamental factors influencing price."2 The common term is the "fundamental factor" referenced in both definitions. Schiller goes on to say that the most common "nonfundamental" factor that drives price increases is a "belief that prices will rise in the future" suggesting that behavior is a key influence in the creation of asset price bubbles. Himmelberg et al in particular reference the recent housing price bubble "as being driven by home buyers who are willing to pay inflated prices for houses today because they expect unrealistically high housing appreciation in the future."3.
             It can be argued that efficient markets are prone to asset price bubbles. If one prescribes to the school of thought of efficient market hypothesis, even as a hybrid with behaviorist ideology, the recent bubble surrounding housing prices and mortgage backed securities can be shown to be evidence that efficient markets can be susceptible to the presence and effects, both positive and negative, to the growth and popping of asset price bubbles.


Essays Related to Economic Price Bubbles


Got a writing question? Ask our professional writer!
Submit My Question