Business Case Studies & Business Publications

Asset Price Bubbles

Bruner, Robert F.,...

Technical Note

Asset Price Bubbles

Bruner, Robert F.; Schill, Michael J.

F-1919 | Published November 7, 2019 | 15 pages Technical Note

Collection: Darden School of Business

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Market lore recounts a host of fabled asset price bubbles: the Dutch tulip bubble of the 1630s, the South Sea and Mississippi bubbles of 1720, the dot-com bubble of the late 1990s, and the global real estate bubble of the mid-2000s. One survey reported the occurrence of some 60 bubbles since the 17th century. Despite their apparent prevalence, asset price bubbles are a challenging theoretical and empirical concept. The aims of this note are to: explore the concept of an asset price bubble; consider some tell-tale signs of a bubble from the standpoints of economic theory, empirical research, and market lore; survey evidence about the existence of bubbles; summarize theories about the causes of bubbles—especially the apparent irrationality of bubbles and the behavior of rational sophisticated investors in buying into them; and finally, highlight some of the regulatory dilemmas that bubbles present. Although the existence of the occasional asset price bubble may seem obvious to the casual observer, this note explains why bubbles are hard to identify and challenging to trade upon.