The Effect Of Bubbles And How They Affect Investment

1835 WordsMay 8, 20168 Pages
2. The definition of bubbles and how they affect investment This section will focus on the analysis about how bubbles affect investors’ behaviors. Since bubbles are closely connected with crises, doing research on investors’ behaviors about overvalued assets can help economists to understand crises’ fundamental. Therefore it is good for governments to take actions to prevent these crises. The first part of this section will describe the definition of “bubbles” in detail, and the second part will illustrate relevant empirical evidences to further explain how bubbles affect investing behaviors. 2.1 Theoretical research C. Kindleberger (1978) first defined “bubbles” as a continuously increasing process of assets’ price. This phenomenon…show more content…
Finally he found investors’ behaviors in terms of the overvalued assets played an important role in this process. Joesph E. Stiglitz (1990) agreed with the theory above, and suggested that if investors thought assets could be sold over their expectation, they would do more investment, and then assets’ actual price would increase, which also means the bubbles would appearance. He thought it is important to prove the existence of bubbles, since they can implicate the future decrease of assets’ price. Therefore governments could take actions to control investors’ behaviors and avoid crises. But by taking the 1960s crisis as an example, he found bubbles’ existence was difficult to test. It is because bubbles would not exist only if the assets’ discount rate increased equal to the assets’ price, which means the assets’ value would be equal to the discount value. But this equilibrium is not expectable. Then Stiglitz proposed that the markets might have multiple equilibriums, so he collected many economists’ thoughts about this opinion. But he found models of different economists were developed in terms of different methods, so they cannot reach an agreement. But he suggested that it is still important for economists to analyze this problem in further studies. Basing on the research of other economists, Robert S. Chirinko and Huntley Schaller finally built a widely accepted model, Q equation, to test bubbles’ existence. The
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