By William Curt Hunter, George G. Kaufman, Michael Pomerleano
In either the industrialized and constructing worlds, a particular characteristic of the final twenty years has been lengthy buildups and sharp collapses in asset markets reminiscent of inventory, housing, and trade markets. The volatility has sparked extreme debate in educational and coverage circles over the perfect financial and regulatory reaction to dramatic industry shifts.This booklet examines asset expense bubbles to extra our realizing of the reasons and implications of economic instability, concentrating on the possibility of crucial banks and regulatory organizations to hinder it. The ebook grew out of a convention together subsidized through the Federal Reserve financial institution of Chicago and the area financial institution staff in April 2002.
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Extra resources for Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies
They, thus, help to amplify market trends, buying more as the market rises 20 Chapter 2 and liquidating more as the market drops. It can be argued that index funds distort the price of the targeted indices and that, as a result, the indices end up creating rather than measuring performance. 4. Last but not least, the impact of risk management techniques on market dynamics is particularly enlightening with regard to the question of asset price overshooting. Value-at-risk (VaR) calculations have become a crucial element of the standard approach used by market participants to evaluate the risk inherent in their market activities and to set up exposure limits.
Because they use more or less similar parameters and suffer from the same weaknesses—for example, they did not take market liquidity into account adequately at the time of the 1998 crisis—such tools might tend to give converging signals to those that use them. They, thus, encourage the mimetic behavior that I discussed previously. Of course, the fact that some market participants are more sophisticated than the average is a guarantee that standardization will remain limited, since these participants will develop techniques that are little used by others.
To answer this question, we need to delve into the source of an asset price bubble—the mispricing of assets. Having taught at the University of Chicago for more than a decade, I understand quite well that the issue of asset pricing—and their mispricing—is serious business. Standard finance theory offers several ways to think about how markets incorporate information into asset prices. The weak-form market efficiency criteria state that market asset prices reflect only information contained in the history of prices or returns themselves; the semi-strong market efficiency criteria state that market asset prices reflect all information known to all market participants (all public information); and strong-form market efficiency criteria state that market asset prices reflect all information known to any market participant (all public and private information).