Bubbles

Stock Markets and
Bubble
Presented By
Irene- 2022062
Abhishek-2022064
Kritin- 2022081
KJ- 2022082
Kushal- 2022093
Mithila - 2022108
1. Introduction
CONTENT 2. What is Bubble
3. How it Forms
4. Stages of Bubble
5. How it Bursts
INTRODUCTION
HOW IT FORMS
EASY MONEY: THE FUEL FOR THE FIRE

• Interest rates play a significant role
• Increased money supply
EMEDIA FRENZY: FANFARE AND HYPE

• Media outlets can play a significant role in inflating a bubble. They may focus on positive stories about
certain companies or industries,
• Sensational headlines and celebrity endorsements can further fuel the hype, encouraging people to jump on
the bandwagon without proper research.
HOW IT FORMS
HERDING BEHAVIOR: THE POWER OF THE CROWD
• Investors can be susceptible to herding behavior, which is the tendency to follow the actions of others.
• When they see others making money on a particular stock or sector, they may be more likely to invest
themselves,
• This bandwagon effect can further inflate the bubble and create a sense of invincibility.
SPECULATION OVER FUNDAMENTALS
THE ALLURE OF INNOVATION: A DOUBLE-EDGED SWORD

• Technological advancements can be a catalyst for stock market bubbles. Investors get excited about the
potential of new technologies and companies, driving up stock prices.
STAGES OF A BUBBLE
DISPLACEMENT
01
• Occurs when investors are captivated by a new paradigm.
• Examples include innovative technologies or exceptionally low interest rates.
FEDERAL FUNDS RATE REDUCTION (JULY 2000 - JUNE 2003)

• Federal funds rate decreased from 6.5% to 1.2%.
• Prime instance of displacement in action.
IMPACT ON HOUSING MARKET:

• Seeds for the future housing bubble planted during this period.
• Interest rate on 30-year fixed-rate mortgages declined by 2.5 % points.
• Reaching a historic low of 5.23%.
STAGES OF A BUBBLE
BOOM
02
• Initial slow price increase followed by accelerated growth.
• More participants enter, signaling the onset of the boom phase.
• Asset gains significant media attention during this period.
SPECULATION AND FEAR OF MISSING OUT
• Fear of missing out on lucrative opportunities drives additional speculation.

• Potential for once-in-a-lifetime gains fuels interest from traders and investors.
• Increased influx of participants further fuels market activity.
STAGES OF A BUBBLE
EUPHORIA
03
• Era marked by significant surge in asset prices, leading to disregard for caution.
• Unprecedented valuations observed during this phase.
• New metrics and measures introduced to justify continuous ascent.
"GREATER FOOL" THEORY IN ACTION

• Belief that there will always be buyers willing to pay higher prices dominates.
• Exemplified by extreme valuations in various markets.
STAGES OF A BUBBLE
PROFIT-TAKING
04
• Astute investors begin liquidating their assets to capitalize on profits.
• Perception of an imminent bubble burst prompts strategic moves.
CHALLENGE OF TIMING BUBBLE BURST

• Identifying the precise moment of a bubble's collapse proves difficult.
• In August 2007, BNP Paribas halted withdrawals from three investment funds due to exposure to
U.S. subprime mortgages.
• Initial market reaction was alarmed, but optimism prevailed as global equities surged.
• In retrospect, BNP Paribas' action foreshadowed the impending crisis.
• Initially considered insignificant, it later proved indicative of the unfolding events.
STAGES OF A BUBBLE
05 PANIC
• A small event can burst a bubble, rendering reinflation impossible.

• Asset prices decline rapidly, mirroring their earlier ascent during panic periods.
• Speculators and investors rush to sell amid margin calls and declining values.
SUPPLY-DEMAND IMBALANCE
• Asset prices plummet as selling pressure surpasses demand.
• Example: October 2008 Financial Panic:
• Following Lehman Brothers' bankruptcy and near-failures of AIG, Freddie Mac, and Fannie Mae.
• Witnessed one of the most intense global financial market panics.
• S&P 500 experienced a drastic 17% decline, marking its ninth-worst monthly performance.
BUBBLE BURST
DOT-CUM BURST
RISING INTEREST RATES

ONSET OF A RECESSION IN JAPAN
OVERVALUATION OF INTERNET
COMPANIES
LACK OF PROFITABILITY AND
SUSTAINABILITY
HOUSING BUBBLE BURST
• Subprime Mortgage Lending
• Speculation and Investor Demand
• Housing Market Correction
• Low interest rate
• Overpricing of real estate
and Housing
Japanese Asset Price Bubble
• Record low interest rates fuelling the

stock market,
• Speculation in real estate sending
valuations through the roof.
• General overconfidence
The stock market plunged 60 per cent from December 1989 to August 1992
TULIP MANIA
• A speculative bubble
• Lack of Intrinsic Value
• Shift in Market Sentiment

Current Situation?
Are we in a bubble right now?

Senses Earnings Yield gap turns negative

Bubbles

Uploaded by

Copyright:

Available Formats

Bubbles

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bubbles

Uploaded by

Copyright:

Available Formats

Stock Markets and

CONTENT 2. What is Bubble

EASY MONEY: THE FUEL FOR THE FIRE

• Increased money supply

EMEDIA FRENZY: FANFARE AND HYPE

SPECULATION OVER FUNDAMENTALS

THE ALLURE OF INNOVATION: A DOUBLE-EDGED SWORD

FEDERAL FUNDS RATE REDUCTION (JULY 2000 - JUNE 2003)

IMPACT ON HOUSING MARKET:

SPECULATION AND FEAR OF MISSING OUT

• Fear of missing out on lucrative opportunities drives additional speculation.

"GREATER FOOL" THEORY IN ACTION

CHALLENGE OF TIMING BUBBLE BURST

• A small event can burst a bubble, rendering reinflation impossible.

RISING INTEREST RATES

• Record low interest rates fuelling the

• Lack of Intrinsic Value

• Shift in Market Sentiment

Are we in a bubble right now?

You might also like