Rumors That The Stock Market Is In The Midst Of A Bubble Are Rampant

Recent rumors that the stock market is in the midst of a bubble seem to be more than just a rumor.

At least this is the conclusion of a recently released research on the predictability of market bubbles. In contrast to previous studies, this latest study has reached the conclusion that "sometimes people can call it a bubble with some confidence", while previous studies have repeatedly pointed out that bubbles cannot be determined in advance.

The latest research report, titled "Fama Bubble", was written by Robin Greenwood, a professor of finance and banking at Harvard Business School, Andre Shriffe, a professor of economics at Harvard University, and You Yang, a doctoral student at Harvard University. It is reported that Greenwood is still engaged in behavioral finance and finance Chairman of the stability research project.

In the process of rigorous analysis of bubbles, an important first step is to accurately define what a bubble is. Researchers point out that the sharp rise in prices is not the only feature of bubbles, because not all sharp rises in prices lead to bubbles. Similarly, the sharp decline in prices does not mean that the previous rise is a bubble.

The new study defines a bubble as one in which the price increases by at least 100% in two years, and then falls by at least 40% in the following two years. Most people agree that any market meeting the above conditions constitutes a bubble. For example, the NASDAQ Composite Index met these conditions in the late 1990s and early 21st century.

One corollary of the researchers' definition is that when this definition is applied to the whole market, the market can be regarded as a bubble very rarely in American history. Even the housing boom that ended in 2008 cannot be regarded as a bubble. Since 1928, there have been only two bubbles, one that reached its peak in 1929, and the other at the beginning of the 21st century Internet bubble 。

The small number of samples makes any conclusion almost impossible to be statistically significant. In order to overcome this, the researchers applied their definitions to various industries, and found 21 foam samples since 1928. The most recent one occurred in the coal industry. The bubble reached its peak in mid-2008, after which the industry suffered a loss of 74%.

Fama quoted in the research title refers to Fama, a famous professor of finance at the University of Chicago - Nobel laureate. He once said that when it was defined as "a price boom that irrationally implies that prices may fall sharply later", bubbles did not exist. He also pointed out that the average return after a sharp rise in prices would not be significantly lower than the average level of previous years.

Harvard researchers agree. They admit that Price After rising by at least 100%, the average return of the market in the next two years will not be significantly different from other times. But their research focused on a number of different points - the probability of a crash and statistical predictability. Since 1928, the situation of "an industry has risen by at least 100% in two years" has occurred 40 times, and the situation of falling by more than 40% in two years has occurred 21 times, accounting for 53%.

After nearly half of the price boom, prices continue to rise. After averaging these rising gains with the subsequent decline, the yield after the price rise was not particularly higher than the normal level. The probability of collapse is more than 50%, which is still a valuable piece of information. This probability is higher than people's expectation of a random collapse. In view of this, Harvard University researchers believe that Fama's analysis of bubbles is wrong.

The researchers found that the sharp price rise most likely to lead to the crash is related to the increase in volatility, the increase in the proportion of companies issuing shares in the following year, the disproportionate rise in the price of new enterprises, the acceleration of price rise, and the higher than average P/E ratio.

How to view the current market according to the latest research report? It will not even be close to the first one that meets the bubble generation conditions they proposed. In an interview, Greenwood pointed out that no industry has increased by 100% in the past two years. The two-year yield of the whole market is only 19.2%.

What other indicators have the researchers identified? Greenwood stressed that other indicators will not work unless the conditions for price increase are met. However, it is worth mentioning that many of them are not danger warnings yet. For example, market volatility has been decreasing rather than increasing in recent months. The proportion of enterprises issuing new shares is also lower than the historical average.

In view of this, why are people generally talking about bubbles? Will Goezman, a professor of finance at Yale University, believes that this is related to investors' occasional bubble hints. When they claimed that we were in a bubble, they began to exceed the forecast of a decline, and hinted that those who lost money in the downturn would get what they deserved. Note that we cannot draw the conclusion that "the stock market will not experience a sharp decline in the next year" from the research report of Harvard University. In fact, Greenwood once pointed out that market valuations did not seem to have spread. But the possibility of allowing a bear market does not mean that we are in a bubble.

At least at this level, investors can breathe easily.

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