Analysis of bubble crisis with behavioral finance

Document Type:Thesis

Subject Area:Economics

Document 1

The bubbles crisis are the price ranges that greatly rise to exceed the assets’ intrinsic value. The occurrence of a bubble crisis can create a great destabilization on the developments and the price range of the major goods and services in the business world. When such issues occur, then the business scale is greatly hurt and it may cause a lot of problems in the business and in the general economic world. The bubble crisis affects the value of goods in the market, the normal market prices of such goods and also the entire economic scale of the world. The purpose of this study is to develop the analysis of the bubble crisis that affected the financial world since 1970 up to date and reexamines some theoretical overviews that seek to explain and provide knowledge on such bubble crises.

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The country had also adopted a healthy trade policy and the development of the Plaza Accord of 1985 caused the Yen currency to appreciate against the other major denominals in the world. This, in turn, made foreign capital investments relatively inexpensive for Japanese companies. Therefore, the combination that was created as a result of the excessive liquidity in the banking sector, the currency deregulation and the verge to make the Yen more superior to any other denominations in the country created overconfidence and overexuberance in Japan’s economy, which became the second largest economy in the world after the USA in just a few decades. The same led to the aggressive speculation in domestic stock and also in the real estate industry and hence pushing the prices of this assets in more exorbitant prices that created an astounding amount of bubble wealth in the country.

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However, the Japanese banking system realized that there was something wrong and hence it began to regulate its banking and general monetary system and the bubble hit a dead end in 1991. The economy of Japan had done subsequently after the second world war due to the role of the American nation in the quest to rebuild Japan’s economy. Therefore, Japan had grown significantly to be one of the major forces and the major economies in the Asain content. Most of the countries depended on Japan as a great lending factor who lent a lot of money to other Asian countries (Miller & Pongsak 73). The overdependence on Japan by typically all the major countries in Asia as the major economic block was a blunder that greatly contributed to the Asian Equity Market Bubble.

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Unkwon to many Asain countries, Japan was depending on an untrue economy that supported its entire system. They had considered Japan as a regional superpower and regional economic giant and hence they had created much dependence in the country. However, the overconfidence that they had was not real as Japan was then living in an economic fantasy. In the long run, the bubbles in Japan created and engineered the subsequent bubbles all across Asia. The overconfidence that most of the Asain countries had developed about Japan is largely to blame for the Asain Equity Market Bubble that subsequently hit the whole of the Asian region in 1997. Dotcom Equity Markets Bubble The Dotcom Equity Market Bubble was the bubble that hit the United States between 1999 and the year 2000.

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As NASDAQ continue to grow exorbitantly, the bubble hits its peak and the company failed trillions of investments that had been created in the bubble evaporated (Ofek & Mathews 1119). The major theory that can explain the developments and the major occurrence as explained in this theory is based on the theory of Heterogeneous traders theory. Akerloff Shiller Le Baron. According to the theory, information asymmetry leads to different types of traders, noise trend and buy and hold ideas. The idea here is that anything or any new occurrence may affect the general development of the theory. The first hit crisis was felt by the house realtors who felt that the normal prices of the houses will be back to normal but the same, was not the case as the same was not witnessed on time.

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The development of the same was based on the idea that banks had allowed the people to take out loans 100 percent or more of the value of their new homes (Barberis 18). Therefore, the blames that were experienced in this case were all heaped on the Community Reinvestment Act. The investment pushed banks to make investments in subprime areas, but that wasn't the underlying cause. The Hedge Funds and other financial institutions across the world owned the mortgage-backed securities and the same also steered the entire bubble-ups. During this era, the banking system in Scandinavia was going through a lot of renovations and there was a high demand for housing in the country. Most people took loan and mortgages to help the people secure the capital to buy and acquire the housings.

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