Detecting and measuring financial market bubbles

Abstract

Reviewing the history of financial bubbles indicates that there is no unique definition of the financial bubbles. Given the importance of understanding financial bubbles, the focus of this research is to define and detect bubbles in financial markets. The identification of bubbles is conducted by using stock prices from the internet bubble in the late 1990s. This study defines a bubble based on if the current stock price increases by more than 100% and then decreases by at least 50%. Bubbles were found in 30 of the 40 internet companies studied. The first approach using mostly 10 and 40 day moving averages indicated that most bubbles occurred in less than 150 days from beginning to end. The second approach was to measure the size of the bubble and results showed that most of the bubbles were smaller in size. For the third approach, measuring asymmetry of bubbles, results showed that stocks fall faster than they rise. These insights may be valuable to assist investors and policymakers with their decision making.