Bubble

Bubbles are market conditions in which prices are greatly in excess of 'fundamental' valuations.

The bubble is likely to burst at some future point, with a rapid fall in market prices.

It can often be difficult to detect the existence of a bubble before it has burst.

False presumption delayed effective action

"The prudential apparatus has worked in the past on the presumption that all movements in asset prices were based on fundamentals.

This approach may prevent supervisors from dealing with excessive procyclicality until it is too late.

The existence of bubbles, for instance, is impossible to prove until they burst.

And, at least in the initial phase of a bubble, there is no lack of "fundamental" explanations for observed movements in asset prices."

Jean-Pierre Landau, Deputy Governor of the Bank of France, BIS Review 94/2009.

See also

• Adaptive expectations
• Correction
• Crash
• Dislocation
• Efficient market hypothesis
• Fundamental analysis
• Herd behaviour
• Mean reversion
• Overshooting
• Procyclicality
• Random walk
• Rational expectations
• Speculation
• Supervisor
• Systemic risk
• Trend
• Volatility

Other resource

• Procyclicality - what it means and what could be done - Jean-Pierre Landau, Deputy Governor of the Bank of France, BIS Review 94/2009