Price Bubbles Research Articles

Testing the hypothesis of duration dependence in the U.S. housing market

The aim of this work is to test for duration dependence to examine rational speculative behaviour in the US housing market. Unlike other works that also test for duration dependence in stock markets, we use the Home Price Index, in a fractionally integrated model to calculate the runs of abnormal returns, and a flexible non-parametric model to estimate the hazard function of these runs. After applying the models, we conclude that the condition is not fulfilled in the US housing market. To the best of our knowledge, it is the first time that a combination of fractional integration along with a modern non-parametric duration model is applied to test for rational speculative bubbles in the US housing market.

Are markets sentiment driving the price bubbles in the virtual?

This paper investigates the existence of speculative bubbles in four crypto-market components (Bitcoin, Ethereum, CRIX index, DeFi pulse index) while date-stamping them, before using a wavelet coherence approach to look after the co-movement of each of those four digital tokens with three sentiment indices reflecting three different markets (Stock, gold, and crypto markets). Thereafter, we study the sentiment-price return connection and its concordance with periods of existing bubbles. Our results show the existence of multiple bubble regimes in the virtual market and more specifically, a huge bubble occurring during the crypto-market bull phase for Bitcoin, Ethereum, and CRIX. Moreover, we find that the bubbles that occurred during the COVID-19 pandemic concord with periods of high sentiment co-movement with the three markets. Hence, some of those bubble periods are in phases with periods of high co-movement with sentiments toward different markets. In addition, the fear and greed toward the crypto-market seem to be the leading sentiment index that highly influences the crypto-market components and their bubble appearances.

Asset securitization and bank stock price performance: Bubble increase or risk transfer?

In this study, we analyzed 40 commercial bank annual reports from 2014 to 2021 to clarify the influence of tangible and intangible asset securitization on bank stock price bubbles, based on the banks’ preference for issuing asset securitization. The empirical findings show that tangible asset securitization suppresses the emergence of bank stock price bubbles by improving internal control quality. In contrast, intangible asset securitization weakens the internal control quality while enhancing bank liquidity, exacerbating stock price bubbles. Furthermore, the results of configuration research found interactions between factors that impact bank stock price bubbles, no single factor is necessary to exacerbate bank stock price bubbles. Additionally, three configurations dominate high stock price bubbles in banks: liquidity, credit, and profit risks. The study recommends that banks develop asset securitization issuance policies, promote business transformation, prevent and resolve systemic risks, and facilitate capital market improvement and high-quality economic development.

Detecting housing bubble in Poland: Investigation into two housing booms

The paper investigates the potential house price bubble in 18 provincial capital cities in Poland from 2000 to 2022. This is the first comprehensive effort to examine the house price exuberance throughout two housing market cycles (2000–2013 and 2014–2022, respectively). Additionally, we evaluate the risk of the housing bubble during a volatile era when the housing market in Poland was exposed to significant external shocks connected to COVID-19.In the study, we apply the new generation of recursive housing bubble identification procedures developed by Phillips, Shi and Yu (2015) and test whether the explosive behaviour of house prices in Polish cities was linked to household incomes and rents. Using the Error Correction Model, we also checked whether house prices were linked to fundamentals.In general, we observed explosive behaviour of house prices during the 2006–2007 period, which is not justified by fundamentals in all cities examined. The length and precise timing of the bubble phases varied amongst regional cities. Despite this, the findings are consistent with earlier data from other nations, which adds credence to the idea that the 2007 housing bubble was a worldwide occurrence. Contrary to what is commonly believed and reported in the media, we have not seen any indications of irrational house price behaviour in Polish cities during the Covid-19 outbreak. Contrary to the overwhelming evidence for the house price exuberance between 2006 and 2007, we conclude that there is no solid evidence of the existence of the housing bubble in recent years.

A Mathematical Model of Financial Bubbles: A Behavioral Approach

In this work, we propose a mathematical model to describe the price trends of unsustainable growth, abrupt collapse, and eventual stabilization characteristic of financial bubbles. The proposed model uses a set of ordinary differential equations to depict the role played by social contagion and herd behavior in the formation of financial bubbles from a behavioral standpoint, in which the market population is divided into neutral, bull (optimistic), bear (pessimistic), and quitter subgroups. The market demand is taken to be a function of both price and bull population, and the market supply is taken to be a function of both price and bear population. In such a manner, the spread of optimism and pessimism controls the supply and demand dynamics of the market and offers a dynamical characterization of the asset price behavior of a financial bubble.

Finance and local economic growth: New evidence from China

AbstractWe study the relationship between finance and growth using a sample of 275 Chinese cities from 2009 to 2018. We exclude bank loans to local governments through the local government financing vehicles (LGFVs) and construct a better financial development index which measures the level of loans extended by banks to enterprises and households. We find that financial development in the form of a higher loan‐to‐GDP ratio leads to lower economic growth. This negative relationship between finance and growth may be attributed to various mechanisms, including discrimination in bank lending, housing market bubbles, and an imbalance in growth between real and financial sectors.

The Double-edged Impact and Solution of Emission Trading Scheme: Perspective from China

Emission Trading Scheme (ETS) is widely used for carbon emission globally, but there are few comprehensive studies about the debate of the impact of ETS. This paper presents new evidence of the double-edged impact and solution of Emission Trading Scheme by conducting qualitative methods like literature review to overcome the debate. Using evidence from China, it is found that the positive impact of ETS includes emission reduction, technological innovation and cheaper cost for emission reduction; the negative impact includes loss of GDP, carbon leakage and price bubble. In light of the findings, the negative impact of ETS could be overwhelmed by related policies like extending the coverage of areas and industries, combing ETS with a package of other related intervention and the supply of carbon tax.

The measurement of zombie enterprise under information asymmetry–a case of China’s iron and steel industry

ABSTRACT The problem of zombie enterprises originated in Japan’s bubble economy around 1990. Afterward, after China’s oversupply problem in 2016, it gained attention and received policy support from the Chinese government in solving related problems. The contribution of this measurement is to integrate the investor’s demand index for listed companies and the company’s actual production and operation performance simultaneously. Based on the panel data of 28 Chinese-listed iron and steel enterprises from 2003 to 2022, the simulation and empirical analysis are carried out. Our research found that the 28 listed steel enterprises in China generally performed poorly from 2007 to 2016, and even some steel enterprises had negative operating profits, but they still survived in the market. In addition, there is a problem of information asymmetry between the actual operation of the enterprise and the capital or financial market in the listed steel industry in China.

Non-normal interactions create socio-economic bubbles

In social networks, bursts of activity often result from the imitative behavior between interacting agents. The Ising model, along with its variants in the social sciences, serves as a foundational framework to explain these phenomena through its critical properties. We propose an alternative generic mechanism for the emergence of collective exuberance within a broad class of agent-based models. We show that our model does not require the fine-tuning to a critical point, as is commonly done to explain bursts of activity using the Ising model and its variants. Instead, our approach hinges on the intrinsic non-symmetric and hierarchical organization of socio-economic networks. These non-normal networks exhibit transient and unsustainable surges in herd behavior across a wide range of control parameters even in the subcritical regime, thereby eliminating the need for the - arguably artificial - fine-tuning proximity to a critical point. To empirically validate our framework, we examine the behavior of meme stocks and establish a direct linkage between the size of financial bubbles and the degree of non-normality in the network, as quantified by the Kreiss constant. Our proposed mechanism presents an alternative that is more general than prevailing conceptions of instabilities in diverse social systems.

Long-Run Labor Costs of Housing Booms and Busts

Abstract We show large flows of workers into the real estate agent (REA) occupation during the early 2000s from virtually all parts of the skill, wage, and education spectrums. We find those entering REA in Metropolitan Statistical Areas (MSAs) with house price bubbles end up in occupations paying significantly less in the long-run as compared to similar REA entrants in non-bubble areas. Even in 2017, when house prices and employment return to their pre-crisis levels, REA entrants in Bubble MSAs are in occupations earning about 6% less. These results point to lasting effects of labor allocation decisions in response to distorted price signals.

Sustainable development, Agenda 2030 and food security in historical perspective

The sustainable development (SD) concept has won substantial popularity in recent decades. At the same time, neoliberalism (the socio-economic orthodoxy since the mid-1970s) is somewhat put in the shade. The paper attempts to find out whether the SD paradigm and its recent incarnation (Agenda 2030) constitutes a decisive break from the mainstream. The second aim is to assess whether the concept of food security is adequately addressed by the Agenda 2030. The study shows that Agenda 2030, with its 17 Sustainable Development Goals, is a much broader concept than preceding MDGs, but it still cannot guarantee the attainment of food security both in the short-term (the risk of commodity price bubbles) and in the longer-term (i.e. till 2030) due to the prevalence of extreme poverty, high-income inequality, structural weakness of many developing countries and inadequate global regulation.

A Feast in Time of Plague: Debt-Financed Spending Spree during the Pandemic

The paper explores the nexus between household consumption, financialization, and socio-economic policy. We focus on the recent episode of debt-financed buying of passenger cars which took place in Russia in 2020–21, amidst the Covid pandemic. We collect statistics on car sales, car loans and household income, and construct metrics to gauge leveraged car buying. The latter is found to be relatively inelastic to the price of a car and personal income. Two specific factors are highlighted: (a) speculation, alias hedging, to which households resort under financial instability; and (b) government policy aiming to facilitate household access to car loans. Conceived as a palliative against the pain of economic downturn, loan availability might instead bolster speculative demand and inflate price bubbles. The paper contributes to the body of literature on the sociology of consumption, household financialization, and the political economy of lending.

Elements Affect Japan GDP Growth

After a severe economic crisis, the Japanese economy entered a recessionary phase. Since the 1990 bubble economy, consumption, investment, and export became essential factors to support Japan GDP growth. This paper is supported by data collected by the International Financial Statistics (the base year is the 2015 Japanese Yen). Therefore, this paper also applies the Hodrick-Prescott filter to extract the cyclical rate of change of the variables and analyze the de-trend correlation of each factor with GDP. This method estimates the best-fitting directional line from a frequently fluctuating data set. According to the analysis, Japan's GDP remained generally unchanged with a slight increase after the bubble crisis, which again proved the country's economic stagnation. However, Japan's exports grew significantly this year, effectively giving a short-term increase in GDP. In addition, consumption has the least fluctuation with GDP, and focusing on the development of consumption can bring stable long-term growth to GDP. In summary, this paper analyzes and argues that factors of production such as consumption and exports may get Japan out of this predicament.

Testing for financial bubbles in the presence of auto-correlated errors

How to detect financial bubble? In response to this question, a vast amount of empirical research is devoted spanning almost half-century. However, identifying unambiguously the presence of a bubble in the financial time series remains an unsolved problem in standard econometric and financial economic approaches. In this paper, we study the impact of auto-correlated innovations, which is a most common feature of the financial time series, on recently developed unit root tests with varying lag to detect financial bubbles. We apply the more powerful test procedure to identify bubble on the quarterly observations of house price-rent ratios of 4 counties. The results of the study suggest that rolling Max Supremum Augmented Dickey-Fuller (MSADF) test as the best test procedure to detect financial bubbles in the future.

An Application of the “Recursive Flexible Window” Methodology to Test for Financial Bubbles in a Major Stock Market

Identifying and dating financial bubbles in real time is in the forefront of current empirical research. Their accuracy provides real time useful “warning alerts” to central bankers and fiscal regulators. The complexity of their nonlinear structure and the inherent sudden break mechanisms makes the econometric testing challenging. The new recursive flexible window methodology provided by Phillips, Shi, and Yu (2015) gives consistent results and delivers significant power gains when multiple bubbles occur. It successfully identifies well-known historical episodes of exuberance and collapse. In this paper we look at the Indian stock market indices, the SENSEX, and the NIFTY 50, to see if there is any evidence of a bubble there. We use monthly data for each series, with the Sensex data spanning April 1979 to October 2018 and NIFTY 50 data spanning July 1990 to October 2018. The existence of bubbles in this index will give us some indication of where bubbles are more likely to occur, and therefore provide evidence of potential economic (financial) crises.

The crisis of neo-liberal capitalism

Neo-liberal capitalism brings about a de-segmentation of the world economy whereby wages in the “north” remain subdued by being linked to the massive labor reserves of the “south”, even while these reserves themselves swell despite relocation of activities from the “north” to the “south”. At the same time labor productivity rises everywhere; the net result is a rise in the share of surplus in total output in the world as a whole, which creates an ex ante tendency towards over-production. This tendency, kept in check for a while by asset-price bubbles in the U.S., has now manifested itself in the form of a secular stagnation of the world economy which cannot be overcomewithin the neo-liberal regime itself and which is now producing a world-wide tendency towards fascism.

What Influenced Hanoi’s Apartment Price Bubble between 2010 and 2021?

This study focused on testing the existence of an apartment price bubble in Hanoi (Vietnam) and on determining the factors that affected it in the period between 2010 and 2021. Using the fundamental factor approach, the authors applied VAR regression using time series data. Specifically, we used the ADF unit test to test the stationarity of the variables based on the following criteria: AIC (Akaike information criterion); LR (likelihood ratio); FPE (final prediction error); HQ (Hanan–Quinn information criterion); and Schwarz (SC) to find the optimal lag (Lag) for the model. We also applied the Granger causality test to determine the correlation between the economic variables that appeared in the model with the PR index. We present the results of the research model through the push–response function and the variance decomposition to consider and evaluate the impact of the PR index shock on itself and the other variables. The literature in this field includes many studies that are similar to this one; however, no research has been conducted that has focused on analysing whether variables, such as per capita income and the urbanisation rate, influence the formation of real estate bubbles. This focus is especially relevant in Hanoi, which is an important part of the Vietnamese real estate market. Through this study, we aimed to fill this gap and to contribute to the references on the Hanoi real estate market and its influencing factors.

“The British Lions Crouched to a Nest of Owls”: The South Sea Bubble through the Lens of the London Press

The South Sea Bubble is one of history's most iconic economic events. While much ink was spilled during the bubble year to make sense of events as they unfolded, commentators were left scrambling for ways to grasp what happened because no one had ever experienced a stock market bubble before. This article focuses on how the London press covered the events that later became known as the South Sea Bubble. A review of every newspaper article in which the company was mentioned during the year of 1720 captures how the movement of the price of the company's stock was interpreted, as well as how it was related to broader social, political, and geopolitical affairs.

Undesired monetary policy effects in a bubbly world

AbstractStock market bubbles arise as a joint monetary and financial phenomenon. We assess the potential of monetary policy in mitigating the onset of bubbles by means of a Markov-switching Bayesian Vector Autoregression model estimated on US 1960–2019 data. Bubbles are detected and dated from the regime-specific interplay among asset prices, fundamental values, and monetary policy shocks. We rationalize the empirical evidence with an Overlapping Generations model, able to generate a bubbly scenario with shifts in monetary policy, and where agents form beliefs over transition dynamics. By matching the VAR impulse responses, we find that procyclicality and financial instability align with high equity premia and the presence of asset price bubbles. Monetary policy tightening, by increasing real rates, is ineffective in deflating bubble episodes.

Transmission of housing bubbles among industrial sectors

We find that housing bubbles are accompanied by sluggish demand in non-housing-related sectors both currently in China and previously in Japan. To explain this, we construct a theory to model the differential impact of housing bubbles on housing-related and non-housing-related industrial sectors by combining the neoclassical framework of general equilibrium with the input–output table. We also find that the housing bubble increases investments and output prices in housing-related sectors (crowding-in effect) while simultaneously reducing investments and output prices in non-housing-related sectors (crowding-out effect). Our theoretical findings could explain the negatively significant correlation between housing or land prices and the Consumer Price Index (CPI) during China and Japan’s bubble economy eras. Hence, this paper provides new insights into why and how the housing bubble distorts the economy differentially, for different industrial sectors.