A Historical Investigation of the Catalysts and Drivers of Asset Price Bubbles

Abstract

This paper evaluates the catalysts and drivers of speculative bubbles from a historical perspective. This analysis aims to identify the indicators of speculative bubbles that are commonly present across historical and modern economic bubbles, and to evaluate whether these indicators are present in potential bubble-forming economies. The first section focuses on the theoretical framework of bubble formation under the following dominating theories: self-fulfilling expectation theory, Greater Fool Theory and the Positive Feedback Approach. The first section is followed by a detailed narration of historical bubbles which highlight the factors that contribute to the creation, propagation and bursting of asset bubbles. Next, these historical cases are compared in order to determine the key catalysts and drivers of bubble formation. Based on the qualitative analysis of bubble formation, the relationship between present price change, fundamentals and past price behavior is tested using a pooled regression technique. Concluding remarks will discuss the overall implications of this analysis and provide details of potential future research.