Identifying Speculative Bubbles: A Two-Pillar Surveillance Framework

IMF Working Papers, November 19, 2014

Source details

Canonical URL

Identifying Speculative Bubbles: A Two-Pillar Surveillance Framework

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Bradley Jones
• Published: November 19, 2014
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781498332071.001

Summary

• Author: Bradley Jones
• Date: November 19, 2014
• Core idea: Introduces a two-pillar (price and quantity) approach for financial market surveillance to identify speculative asset bubbles in real time.
• Rationale: Price behavior alone cannot reliably distinguish irrational investor exuberance from rational responses to lower perceived risk. Combining asset pricing models with non-price indicators captures broader risk-taking behavior and financial vulnerabilities.

Two-pillar framework (concept)

• Pricing pillar:
  • Focuses on asset pricing models and risk premia.
  • Identifies episodes with below average risk premia as a signal of potential bubbles.
• Quantities pillar:
  • Focuses on non-price indicators of risk taking and market froth.
  • Key indicators include issuance, trading volumes, fund flows, and survey-based return projections.
• Intuition: Large historical booms and busts often exhibit both below average risk premia (pricing pillar) and unusually elevated quantities indicators (quantities pillar).

Key findings and signals

• The framework appears to capture stylized facts of asset booms and busts.
• Some of the largest boom-bust episodes in history have been associated with:
  • Below average risk premia (captured by the ‘pricing pillar’).
  • Unusually elevated patterns of issuance, trading volumes, fund flows, and survey-based return projections (reflected in the ‘quantities pillar’).
• Application to contemporary markets:
  • Based on a comparison to past boom-bust episodes, the approach is signaling mounting vulnerabilities in risky U.S. credit markets.

Policy recommendations and implications

• Policy makers and regulators should be attune to any further deterioration in issuance quality.
• Where possible, take steps to ensure the post-crisis financial infrastructure is braced to accommodate a re-pricing in credit risk.

Content in this bundle

• Annex 1. Standard Testing Techniques for Speculative Bubbles
  • Annex 1. Standard Testing Techniques for Speculative Bubbles (Markdown version)
  • Annex 1. Standard Testing Techniques for Speculative Bubbles (PDF)