Date of Award
Moore School of Business
The focus of this thesis will be to examine the similarities between the 2007-2008 Subprime Mortgage Crisis and other crises resulting from the collapse of an asset pricing bubble throughout United States financial history. Particular emphasis will be placed on the real estate and stock bubbles of the 20th century, including the events leading up to the Great Depression and the Savings and Loan (S&L) crisis of the late 1980s. I explore commonalities throughout the life cycle of a bubble, from the catalysts that lead to bubble formation, to the drivers that fuel both expansion and collapse, and finally, the impacts that persist in the aftermath of a bubble bursting. It is my belief that rising asset prices that eventually form bubbles are not necessarily bad from the start, but that there may be a common catalyst, like a monetary policy, political initiative or other event, that creates excess liquidity and diverts capital into a particular market, leading price to stray from fundamental value. From there, a number of factors come into play to drive the expansion: social, emotional and psychological factors, like herd behavior, self-generating cycles, perverse incentive structures that encourage short-term thinking and disregard for long-term impacts, among others. Finally, I explore the impact of bubbles, post-collapse. Frequently, the market will have a period of overcorrection in the aftermath of a bubble burst, temporarily bringing prices lower than the price that historical averages would suggest. It begs the question of the extent to which the losses sustained in a bubble are true losses, or simply paper losses from paper gains. My hypothesis is that there are in fact a number of identifiable commonalities among the catalysts, drivers and impacts of asset pricing bubbles that may be useful in avoiding (or capitalizing on) future market failures and may explain why markets experience these types of collapses with such high frequency.
Pensegrau, Lauren Frances, "Commonalities of Asset Pricing Bubbles" (2016). Senior Theses. 63.