Asset bubbles occur when the prices of assets, such as stocks, real estate, or commodities, rise significantly above their intrinsic value, often driven by investor behavior and speculation. During a bubble, the demand for the asset increases dramatically, leading to a rapid price escalation, which can be fueled by optimism, herding behavior, and the belief that prices will continue to rise indefinitely. Eventually, when the market realizes that the asset prices are unsustainable, a sharp decline occurs, known as a "bubble burst," leading to significant financial losses for investors.
Bubbles can be characterized by several stages, including:
Understanding asset bubbles is crucial for both investors and policymakers in order to mitigate risks and promote market stability.
Start your personalized study experience with acemate today. Sign up for free and find summaries and mock exams for your university.