Bubbles and Contagion in Financial Markets, Volume 1: An by E. Porras

By E. Porras

Asset bubbles and contagion have had a profound impact at the monetary markets after the monetary and sovereign debt crises. This ebook takes a quantitative method of reading those phenomena and may attract practitioners who have to comprehend the repercussions of those occasions on buying and selling exchanges and the markets.

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Trading ground to a halt. The stock market plummeted. The economy plunged into a deep recession. (p. xvi) The conclusions drawn by the Majority Report can be summarized as follows:55 s The crisis was avoidable. s The widespread failures in financial regulation and supervision were devas- tating to the financial markets. s The major malfunction of corporate governance and risk management at financial institutions were a key cause. s Excessive borrowing, risky investments, and the lack of transparency shot down the financial system.

Again another feedback loop is blinding participants, as when the money pool enlarges and is used to purchase assets with overvalued growth expectations. Then there is a further appearance of wealth creation, which justifies additional investments to sustain prior debt-equity ratios. This tendency is halted when, for whichever reason, there comes the realization that fundamentals can no longer sustain 26 Bubbles and Contagion in Financial Markets, Volume 1 additional growth. Credit becomes unavailable, prices have reached a plateau, and the bubble is ready to collapse.

Within this group, optimistic investors disregard the fact that pessimistic-short-sale constrained investors imprint their views into prices. Given the differences in opinion and action regarding 20 Bubbles and Contagion in Financial Markets, Volume 1 future outcomes resulting from personality traits and sale constraints, the market price of the asset will have a bubble component. b. Feedback trading. Feedback trading behavior results in a trading strategy based on recent price movements. When an asset’s price increases, feedback traders push the price even further by purchasing it.

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