Essay - Asset Pricing Phenomena: Bubbles, Crashes, and Recoveries Introduction Over the...

ASSET PRICING PHENOMENA: BUBBLES, CRASHES, AND RECOVERIES

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Over the centuries during which organized asset trading has occurred, there have been several spectacular bubbles (rapidly increasing asset prices that surpass supportable values for the underlying assets), dramatic market crashes (rapidly plunging asset ***** to levels well below supportable ***** for ***** underlying *****), and eventual recoveries (where asset prices roughly equate to ***** values ***** the underlying *****s). There have also been put forward many more explanations for *****se anomalies in asset pricing than there have been occurrences of the phenomena per se.

This research examines ***** cycle of asset pricing phenomena described above (*****, crashes, ***** *****) with a view ********** assessing the per*****mance of ***** equity stock markets in the United States for the period 1994-2003. Within the context ***** this research focus, the following questions are addressed:

1. How long is the typical recovery period for equity stocks to regain pre-crash pricing levels subsequent ***** a crash?

2. Did equity stock price growth exceeded equity ***** earnings ***** from 1994 through 2003?

*****. If equity stock price growth exceeded ***** stock earnings growth from 1994 ***** 2003, what factors explained the excess ***** *****?

4. Are equity ***** prices during a bubble phase of ***** ***** pricing ***** cons*****tent with the efficient market hypothesis?

5. What are the implications for future equity stock ***** and the general economy of the Internet equity bubble ***** ***** in 1999-2000?

6. Given the ***** for future equity stock prices and the ***** economy ***** the Internet equity ***** and crash in 1999-2000, what is the recommended strategy for a rational, r*****k-averse, wealth-maximizing investor in 2004?

Approach to the Investigation

***** ***** beg*****s with a review of six past asset bubble-crash-recovery *****s. One of *****se cycles ***** during the ***** period, a ***** that is the focus of question three stated in the preceding section. This review provides and underst*****ing of ***** functioning of ***** asset pricing cycles, along with the factors that were associated with their inceptions and endings. Data also was collected and will be reported that indicate the length of recovery times ***** with ***** return ***** equity asset prices to ***** levels subsequent to a cr*****sh.

***** of Selected Past Bubble-Crash-Recovery Asset Pricing Cycles

***** past bubble-crash-recovery asset pricing cycles ***** reviewed. The six past occurrences of the cycle reviewed are as follows:

1. Tulip Bulb Bubble

2. South Sea Company *****

3. Florida Real Estate Craze

4. Nifty-Fifty Era

5. Equity Asset Bubble in Japan

6. The Internet IPO Bubble [or Dot-Com Bubble]

Tulip Bulb Bubble

The Tulip Bulb Bubble occurred ***** the Netherlands from 1634 through 1637. *****s were introduced to the ***** from the Middle East in 1593. The flowers and plants gained in popularity, and, as a consequence, ***** rose steadily. Because ***** the ris*****g demand for tulips, a ***** developed ***** tulip bulbs. Bulb ***** ********** speculative in nature, wherein few people participating in the market had any *****tention of every actually