Irrational Bubbles Research Articles

Are there irrational bubbles under the high residential housing prices in China’s major cities?

House prices in the main cities of China have been rising to historically high levels. Unsustainable growth of housing prices might cause financial crises and damage the whole economy. This research aims to detect whether bubbles dominate China?s real estate market. It begins by systematically analysing the features of China?s real estate sector, followed by proposing a theoretical framework to identify the fundamentals of house prices and decompose house prices into cyclical and bubble components. It then applies the vector error correction model and other econometric techniques to testify the theoretical framework with data of seven Chinese cities from 2008M01 to 2017M12. The main findings of this research include the following four parts. Firstly, the residential housing market of Shanghai was exposed to the irrational bubble issue, but the rest six cities examined were at safe positions. Secondly, both long-run and short-run relationships between economic fundamentals and house prices have been verified. Thirdly, economic regulations also have significant effects on house prices. Finally, this research suggests that the root cause of the high housing prices in major cities in China is due to the excessive capital injection into the residential property market.

Asset Pricing Bubbles Under Rational Expectations

The Efficiency Market Hypotheses (EMH) imply rational investors and no asset mispricing in the medium run. This paper critically evaluates on the point of whether an asset price bubble is an irrational phenomenon that cannot be detected. Thereby, I review the existing literature and reflect on asset pricing tests to detect bubbles. I show that the emergence of rational bubbles within the EMH framework is indeed possible as long as a number of assumptions is not violated. As researchers show, these assumption do not hold in practice, which means that rational bubbles can be ruled out. Thus, a bubbles is always an irrational phenomenon that can be explained with behavioural models such as feedback trading and herding. This implies that EMH does not hold. Hence, irrational bubbles can only emerge in inefficient markets. Models trying to detect bubbles fail to identify the existence of bubbles ex ante and ex interim. Ex post, they can prove that a bubble had existed.

Toward economics as a new complex system

The 2015 Nobel Prize in Economic Sciences was awarded to Eugene Fama, Lars Peter Hansen and Robert Shiller for their contributions to the empirical analysis of asset prices. Eugene Fama [1] is an advocate of the efficient market hypothesis. The efficient market hypothesis assumes that asset price is determined by using all available information and only reacts to new information not incorporated into the fundamentals. Thus, the movement of stock prices is unpredictable. Robert Shiller [2] has been studying the existence of irrational bubbles, which are defined as the long term deviations of asset price from the fundamentals. This drives us to the unsettled question of how the market actually works. In this paper, I look back at the development of economics and consider the direction in which we should move in order to truly understand the workings of an economic society.

Price Bubbles and Policy Interventions in the Chinese Housing Market

The recent, dramatic increases in house prices have led to considerable attention being focused on housing markets in China. Using a unique dataset of city-level house prices and rents, this paper investigates the presence of price bubbles in major Chinese city housing markets. Our findings show evidence of price bubbles in most housing markets, even though the bubbles might be, to a large extent, mitigated by strong government intervention. In order to distinguish rational bubbles from irrational bubbles, we extend the existing work to allow a deterministic time trend and break points in the unit root test of house price-rent ratios. As a consequence, our results demonstrate that the price-rent ratios in most of the sample cities are no longer non-stationary, implying the non-existence of rational bubbles in the housing markets.

Price bubbles and policy interventions in the Chinese housing market

The recent dramatic increases in house prices have led to considerable attention being focused on housing markets in China. Using a unique dataset of city-level house prices and rents, this paper investigates the presence of price bubbles in major Chinese city housing markets. Our findings show evidence of price bubbles in most housing markets, even though the bubbles might be, to a large extent, mitigated by strong government intervention. In order to distinguish rational bubbles from irrational bubbles, we extend the existing work to allow a deterministic time trend and break points in the unit root test of house price–rent ratios. As a consequence, our results demonstrate that the price–rent ratios in most of the sample cities are no longer non-stationary, implying the non-existence of rational bubbles in the housing markets.

A Deterministic Description of Irrational and Semi-Rational Bubbles in Asset Markets

This present work provides a deterministic description irrational and semi-rational bubbles based on the stylized description forwarded by Hyman Minsky (1972), Day and Huang (1990) respectively. The paper emphasizes on two areas: First, it proposes a mathematical representation of an irrational bubble using piece-wise linear maps in a discrete time frame. Second, it studies the chaotic signals generated by them to explain the instability in asset price bubbles and explains the factors which impact their longevity.

Research on irrational bubbles in the stock market based on the perspective of generalized virtual economy

PurposeThis paper attempts to provide novel approaches and tools for the analysis and measurement of stock bubbles.Design/methodology/approachThe study is based on the perspective of a generalized virtual economy and the circulation process of accumulation strengthening and exclusion in the stock noise and is based on the symmetric chain model of the evolutionary game of combination of stock markets. Based on the stable ratio of the rational and irrational investors and the asymptotically stable strategy of the model in the two cases, the paper uses the improved classic model of noise trading (DSSW) to calculate the irrational bubbles on the Shanghai stock market.FindingsThe paper shows that the more irrational investors are, the higher the irrational bubbles are.Practical implicationsThe method exposed in the paper can be used to study the formation mechanism of the stock market bubble, to analyze the impact of investors' behaviours, to measure the size of irrational bubbles and to put forward some reasonable policy recommendations and preventive measures.Originality/valueThe paper succeeds in pointing out a new stock market's irrational bubble calculation model on the basis of evolutionary game chain structure, and thus measures the size of the Shanghai stock market bubble and makes some tentative research and discussion about the evolution law of the stock market's irrational bubble.

Size and Characteristic of Housing Bubbles in China's Major Cities: 1999–2010

AbstractThere is some disagreement in the published literature regarding the definition and the measurement of housing bubbles in China. Extending the analytical framework of Black et al. (2006), the present paper measures the housing bubbles of China's 35 major cities from the second quarter of 1999 to the second quarter of 2010. The results indicate that the housing bubbles in China's 35 major cities were relatively small in the sample interval, but the bubbles in eastern metropolises, such as Beijing, Shanghai, Shenzhen, Hangzhou and Ningbo, have been relatively big since 2005. The changing tendency of housing bubbles in most cities highly corresponds with the changes in real estate policies. This paper decomposes the housing bubbles of the 35 cities, and finds a great proportion of irrational bubbles rather than rational intrinsic bubbles generated by price speculation. Based on empirical analysis, this paper proposes policy recommendations for preventing the generation and expansion of housing bubbles.

The Demand for New Risky Equity and Prices in Public Equity Markets

This study models price equilibriums that feasibly could obtain within stock markets. In all, the model generates five feasible price equilibriums. Given the equilibrium most attractive to issuers is characterized by presence of rational valuation bubbles, formal predictions show stock prices are prone to development of rational valuation bubbles. In presence of arrival of new innovations within stock markets prior to exhaustion of innovativeness of `previously new' innovations, rational valuation bubbles are maintained ad infinitum. If arrival rates for new innovations lag exhaustion rates for previously new innovations, stock markets experience market correction events. As reasonably could be expected, the formal model provides evidence for feasibility of irrational valuation bubbles within stock markets. Consistent with expectations, where they occur, irrational bubbles are larger in magnitude than corresponding rational bubbles. In this respect, formal predictions show evolution of return processes can be efficient, yet be generated by less than fully rational or irrational game theoretic actions undertaken by issuers or investors at some origin point in time. The study generates two test statistics for rationality of price equilibriums within stock markets, test statistics which, consistent with normative characterization of such statistics, embed jointness of stock prices and returns.

Corporate Equity and Commercial Property Market 'Bubbles'

Periodic sharp sustained increases and then reversals in asset prices lead many to posit irrational price 'bubbles'. The general case for bubbles is that asset prices simply move too much given the future cash flows the assets are reasonably likely to produce. A corollary for property is that observed mean reversion in real cash flows is not reflected in investor valuations, resulting in asset values being too high when real cash flows are high and vice versa. This paper summarises some evidence on large corporate equity and commercial property price movements and present arguments for and against the existence of irrational bubbles.

Speculations on Nonlinear Speculative Bubbles

This paper reviews a variety of issues related to speculative bubbles, especially those involving nonlinear dynamics. Models of irrational bubbles, rational bubbles, and bubbles arising from heterogeneous agents with varying degrees of knowledge or rationality are examined. The latter are shown to be prone to nonlinear dynamics with catastrophic discontinuities, chaos, and other forms of complex phenomena. Empirical evidence regarding the existence of bubbles in various markets is reviewed, eventually examining strong evidence in closed-end country mutual funds markets.

Bubbles, inertia, and experience in experimental asset markets

We find that irrational bubbles continue to form in an experimental assets market even though experience lessens specious market pricing. However, this irrationality may remain hidden from the customary observational perspective. Both price expectations and bubbles appear rational, passing both traditional and cointegration tests. Conventional statistical testing has difficulty distinguishing “irrational” inertia from “rational” market behavior. Yet, inertia provides a much better explanation of observed, experimental market prices than do the “fundamentals” Keywords: Inertia, Rational Bubbles, Experimental Markets, Econometric Testing.

Big Players and Herding in Asset Markets: The Case of the Russian Ruble

We present a theory of asset pricing in which discretionary actions of “Big Players” encourage herding and irrational bubbles, thus weakening the tendency of asset prices to equal their rationally expected present values. The theory implies that when Big Players influence a market, martingale models are inapplicable. We test the theory using qualitative and numerical data from an important episode in Russian monetary history. The use of Benoit Mandelbrot'sR/Sanalysis, a statistical technique appropriate to the study of long-memory processes, supports our claims about herding and martingales. Our results weaken the case for present value models and strengthen the case for noise-trader models. Our theory and technique may be applied in many other historical cases as well as that presented here.

Silly bubbles and the insensitivity of rationality testing: An experimental illustration

Conventional economic and financial theory often requires that market price reflect the ‘rational’ assessment of the intrinsic value of an asset. Yet, gradual booms in security markets and their rapid crash make it clear that prices do not always mirror fundamental values. An experimental market reveals that prices in a double oral auction need not converge to a ‘rational’ value. In fact for this experiment, prices and fundamental values are highly inversely related. More problematic still is the fact that conventional statistical tests of market rationality are unable to detect the irrational bubbles generated by this experiment. This paper illustrates how difficult it is to empirically identify irrationality in simple self-fulfilling behavior and thus how easy it is to label ‘silly’ economic behavior ‘rational’.