Asset Bubble Dynamics

Popping Bubbles

J. Wolinsky:

“Based on the dot.com experience, popping bubbles are often associated with the complete collapse of companies like eToys, Pets.com or Webvan, but that is as much the exception as the rule. It is equally common that following an immense and unsustainable rise in stock price, the bubble pops without much change in the operations and profitability of the company. Instead, the bubble is based on the development of a wildly enthusiastic prediction of the company’s future and is popped by the recognition that the forecasts were wildly enthusiastic. All of this can happen without much change in ongoing operations. The best way to illustrate what can happen is with some examples.”

Kyriazis et. al (2020) review the asset bubble literature for cryptocurrency and apply the Augmented Dickey Fuller (ADF) and Log-Periodic Power Law (LPPL) methodologies to the pricing data. They conclude from the academic research Bitcoin appears to have been in a bubble-phase since June 2015, while Ethereum, NEM, Stellar, Ripple, Litecoin and Dash present evidence of bubble-like characteristics since September 2015.

Returning to Wolinsky, individual bubble dynamics do not appear associated with “mass extinction” events.

References:

Kyriazis, N., Papadamou, S., & Corbet, S. (2020). A systematic review of the bubble dynamics of cryptocurrency prices. Research in International Business and Finance54(101254), 101254.

jwolinsky. (n.d.). Popping Bubbles. Retrieved December 28, 2020, from Slopeofhope.com website: https://slopeofhope.com/2020/12/popping-bubbles.ht

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