Demystifying Bubbles in Asset Prices

Abstract

This paper provides a survey of asset price bubbles. I focus on the theoretical model for pricing assets from both a classical rational expectations model as well as some of the theories from newer behavioral models. A review of empirical methods used to estimate bubbles is presented along with an examination of the difficulties of empirically identifying bubbles in asset prices. I provide a discussion of the role of central banks and whether a response to asset-price bubbles is appropriate on their part and conclude with a summary of some of the more famous bubbles throughout history.