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A Statistical Approach To Identifying Market Bubbles

A new report in The Regional Economist by Silvio Contessi focuses on the difficulties of identifying an asset pricing bubble in real time. While it seems easy to identify bubbles such as the housing bubble and the dot com bubble in hindsight, identifying a disconnect between asset price and asset value as it is happening can be challenging.

What Is A Bubble?

Economist Robert Shiller defines a bubble as “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person…despite doubts about the real value of an investment.”

Contessi also notes that a bubble can be defined as a period in which the price of an...