## 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](https://www.imf.org/en/publications/wp/issues/2016/12/31/identifying-speculative-bubbles-a-two-pillar-surveillance-framework-42459)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/identifying-speculative-bubbles-a-two-pillar-surveillance-framework-42459/index.md)
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## Bibliographic details
- Authors: Bradley Jones
- Published: November 19, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498332071.001

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### 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.

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## Content in this bundle

- **Annex 1.  Standard Testing Techniques for Speculative Bubbles**
  - [Annex 1.  Standard Testing Techniques for Speculative Bubbles (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14208.pdf.md){rel="alternate" type="text/markdown"}
  - [Annex 1.  Standard Testing Techniques for Speculative Bubbles (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14208.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/identifying-speculative-bubbles-a-two-pillar-surveillance-framework-42459_