3 ms·

How do you?

• eru 3y ago
  Wikipedia opens with 'An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify.' I would add that for a definition of 'bubble' to make sense, it should be identifiable to a contemporary observer, and should reliably predict a coming drop in asset prices in that observers future. Reliably enough to (theoretically) trade on it. The last part is important: a bubble call doesn't need to be 100% accurate; just needs to be right often enough to turn a profit. But also: a predictable drop in asset prices by themselves does not indicate a bubble. For a simple counter example, have a look at far out-of-the-money call options. Most of them expire worthless in the future, but that doesn't mean that their proper price is 0. (Or for a more down to earth example: most of the time no accidents happen, but insurance is still worth more than zero a priori, even if it's worthless most of the time a posteriori. Insurance is not a bubble.) Financial markets, especially financial markets that allow easy short selling, are almost never in a 'bubble'.