Stock market bubble

A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation.

Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets.[1] Other theoretical explanations of stock market bubbles have suggested that they are rational,[2] intrinsic,[3] and contagious.[4]

  1. ^ Smith, Vernon L.; Suchanek, Gerry L.; Williams, Arlington W. (1988). "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets". Econometrica. 56 (5): 1119–1151. CiteSeerX 10.1.1.360.174. doi:10.2307/1911361. JSTOR 1911361.
  2. ^ De Long, J. Bradford; Shleifer, Andrei; Summers, Lawrence H.; Waldmann, Robert J. (1990). "Noise Trader Risk in Financial Markets" (PDF). Journal of Political Economy. 98 (4): 703–738. doi:10.1086/261703. S2CID 12112860.
  3. ^ Froot, Kenneth A.; Obstfeld, Maurice (1991). "Intrinsic Bubbles: The Case of Stock Prices". American Economic Review. 81 (5): 1189–1214. doi:10.3386/w3091. JSTOR 2006913.
  4. ^ Topol, Richard (1991). "Bubbles and Volatility of Stock Prices: Effect of Mimetic Contagion". The Economic Journal. 101 (407): 786–800. doi:10.2307/2233855. JSTOR 2233855.