SPECULATIVE BUBBLE:

Asset price bubble represents a major risk for our global linked economies. Few people are responsible but everybody has to face the brutal consequences of the bubble on the real economy. The subprime crisis drew public opinion against the unrestrained financial system that seems favoured. Media level criticism at the bankers who contribute to widen the gap between rich and poor people. Nowadays, in people’s mind, finance is assimilated to speculative behaviours led by an endless greed. Throughout modern history, we can count a dozen of serious speculative bubbles for example the Dutch Tulipmania from 1634 to 1637 or the French Mississippi bubble in 1719. What are the tools to struggle with a bubble, according to the economists? Thus, we will try to understand what an asset price bubble is, the difficulties to foresee the bubble and how a good policy can tackle the deleterious effects of the bubble after its burst.

There is no consensus about the existence of asset price bubbles in the economics world. Well reputed economists claim that even the most famous historical bubbles as well as the worldwide New Economy Boom in the 1990s can be explained by fundamentally justified expectations about future returns of the respective underlying assets. Thus, according to some authors, the observed price developments during the first period of the bubble should not be classified as being excessive or irrational. For example with regard to the New Economy boom of the late 1990s, it has been argued that uncertainty about future earnings prospects increases the share value of a company, especially in times of low risk premium. The claim can be derived in a most standard stock valuation model, where the price-dividend ratio is a function of the mean dividend growth rate. The dividend growth rate in turn depends obviously on future expected earnings of the company. Heightened uncertainty about future earnings will increase the price dividend ratio. It