Abstract
This research paper is an attempt to investigate Asset Price Bubbles (APB) with reference to Pakistan stock market. The analysis of time series graph shows a linear trend between Consumer Price Index (CPI) and Money Supply Index (M2I) whereas a nonlinear trend with stock prices. Moreover, the graph also shows an unequal spread with the stock prices, which indicate Heteroskedasticity. Then, descriptive statistics test shows high Standard Deviations for stock prices compared with CPI and M2I, which indicate a higher volatility in stock prices. Finally, the hypothesis test for equality of variance concluded the presence of Asset Price Bubbles by rejecting null hypothesis of equal volatility against the alternative hypothesis of greater volatility in stock prices.
Highlights
A stock market bubble is a type of economic bubble taking place in stock markets when price of stocks rise and become overvalued by any measure of stock valuation
The main concern of this study is to develop a statistical framework of analysis to identify whether there are asset price bubbles or a swing in the prices
Since asset price bubbles are the result of abrupt fluctuations and high volatility in asset prices that is why a special attention is given to Standard Deviation – a measure of volatility in a data set
Summary
A stock market bubble is a type of economic bubble taking place in stock markets when price of stocks rise and become overvalued by any measure of stock valuation. According to Kindleberger [9], asset price bubbles were permanent features of the economic environment that arose because of the nature of human behavior He bases his understanding of bubbles on Minsky’s model of financial imbalances rather than on the constraints imposed by the assumption of perfectly rational, far-sighted investors. According to Shiratsuka [12] Japan’s experience since the late 1980s where economic fluctuations were led by the emergence and bursting of the bubbles which show a close relation between both, financial and macroeconomic instability, and large fluctuations in asset prices The study characterized such bubble by euphoria, that is, excessively optimistic expectations with respect to future economic fundamentals, which lasted for several years and burst. How far and how long an asset price must move away from its fundamental value before it is considered a bubble is highly subjective
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