What Is a Financial Bubble?
A financial bubble occurs when asset prices rise far above their intrinsic value, driven by speculation and exuberant market behavior. These rapid increases are often fueled by easy credit and optimistic expectations. When confidence fades, prices can drop sharply, leading to significant losses.
How Do Bubbles Form and Burst?
Bubbles typically begin with a new paradigm, such as a technological breakthrough or a period of low interest rates. Investors pile in, pushing prices higher. Eventually, valuations become unsustainable, and a trigger event prompts selling. This can cause a sharp price collapse, sometimes affecting the broader economy.
Examples of Market Bubbles
Historical examples include the dot-com bubble of the late 1990s and the housing bubble that peaked in 2006. Both involved rapid price surges followed by steep declines. Analysts and historians study these events to understand patterns in market psychology and risk. For more details, see the Federal Reserve Bank of St. Louis economic research.
