Working Paper: NBER ID: w21693
Authors: William N. Goetzmann
Abstract: History is important to the study of financial bubbles precisely because they are extremely rare events, but history can be misleading. The rarity of bubbles in the historical record makes the sample size for inference small. Restricting attention to crashes that followed a large increase in market level makes negative historical outcomes salient. In this paper I examine the frequency of large, sudden increases in market value in a broad panel data of world equity markets extending from the beginning of the 20th century. I find the probability of a crash conditional on a boom is only slightly higher than the unconditional probability. The chances that a market gave back it gains following a doubling in value are about 10%. In simple terms, bubbles are booms that went bad. Not all booms are bad.
Keywords: Financial Bubbles; Market Behavior; Historical Analysis
JEL Codes: G01; G14; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Boom (E32) | Probability of Crash Following Boom (E32) |
| Market Boom (E32) | Crash Frequency (C29) |
| Significant Price Increase (D49) | Bubble (Price Decline) (E32) |
| Doubling in Market Value (G19) | Likelihood of Market Giving Back Gains (G17) |