Market Bubble

Module 5
Subject : Behaviour Finaance
 Stock Market
Bubble
 A stock market bubble is when
share prices of stocks rapidly
keep climbing to a point where
they far exceed their intrinsic
value or their earnings.
 When the bubble eventually
bursts and prices start dropping,
it can lead to panic selling and
potentially a stock market crash.
The main defining characteristics of a stock
market bubble

1. Market sentiment

2. Stretched valuations

3. Irrational exuberance

4. Greater fool theory

 stages of a stock market bubble
Stage 1 Displacement

Stage 2 Boom

Stage 3 Euphoria

Stage 4 Profit-taking

Stage 5 Panic
 The biggest stock market bubbles in history
The South Sea Wall Street Crash of
1929 The Dotcom Bubble China Bubble 2015
Bubble

Japan’s 1980s US Housing Bubble

Railway
Market Bubble
Bubble
 The South Sea Bubble
 In 1711, the South Sea Company was
formed to take advantage of a
monopoly on trade with the Spanish
colonies of South America.
 Eager investors piled into the stock, with
a guaranteed interest of 6%, after the
company’s directors claimed that vast
riches awaited.
 The bubble reached its height in 1720
after the UK Parliament accepted the
company’s proposal to take over the
national debt.
 According to the UK National Archives,
more than twice the amount of stock
available was sold to the public, with
this new money paid out to older
investors.
Railway Bubble Wall Street Crash of 1929

 In The rapid expansion of the UK rail  Arguably the most famous of stock
network in the early 1800s market bubbles. More people bought
encouraged investors to hitch a ride shares, many on credit, to profit from
on the growth of railway companies. the rise. However, confidence drained
in 1929, causing the Wall Street Crash.
Japan’s 1980s Market Bubble The Dotcom Bubble

 In response to a slump in 1986, the  The growth of the internet during the
Japanese government launched a 1990s sparked investor frenzy in a
programme of monetary and financial new wave of web-based companies.
stimulus to recharge the economy.
 US Housing Bubble China Bubble 2015

 When the subprime borrowers  a combination of slower economic

defaulted on their loans, it caused a growth and government interventions
ripple effect, leading to a stock market such as credit limits burst the bubble.
crash and the global financial crisis of
2007-2008.
 Consequences of Stock Market Bubble

01 02 03

Widespread
Crash of Market Recession
Discontent
Is Indian Stock Market in a Bubble? What RBI Thinks?

Dated - June 4, 2021

 RBI has expressed concern in its

annual report. In the recently
published report of 2020, they
have indicated where the
economy is on a downtrend. At
the same time, the stock market is
going up.
 Research Paper
01 Bubble Investing: Learning from History
 History is important to the
study of financial bubbles
WORKING PAPER – 21693 precisely because they are
extremely rare events, but
DOI - 10.3386/w21693 history can be misleading.
 The rarity of bubbles in the
ISSUE DATE - October 2015 historical record makes the
REVISION DATE - January 2016
sample size for inference small.
AUTHOR - William N. Goetzmann  He found the probability of a
crash conditional on a boom is
only slightly higher than the
unconditional probability.
 Research Paper
02 Stock market bubbles and unemployment

 This paper incorporates endogenous

ISSUE DATE - February 2016
WORKING PAPER - Economic Theory
61(2):273-307
DOI - 10.1007/s00199-015-0906-7
AUTHORS - Jianjun Miao, Pengfei Wang
and Lifang Xu
credit constraints in a search model of
unemployment. These constraints
generate multiple equilibria supported
by self-fulfilling beliefs.
 A stock market bubble emerges
through a positive feedback loop
mechanism.
 The collapse of the bubble tightens the
credit constraints, causing firms to
reduce investment and hirings.
 References

 “https://www.cmcmarkets.com/en/trading-guides/stock-
market-bubbles
 https://www.wallstreetmojo.com/stock-market-bubble/
 https://www.nber.org/papers/w21693
 https://www.researchgate.net/publication/
301717715_Stock_market_bubbles_and_unemployment
 https://www.youtube.com/watch?v=dJSYwOw1zv0
 Thank You

Submitted by:
Submitted to : Jhanvi Gandhi 207050592011
Mr. Guarang Badheka Vrutika Shah 207050592001