Quantitative Finance Club

Un analista del Société Générale cita a Charles Kindleberger, autor del clasico Manias, Panics, and Crashes: A History of Financial Crisis, al esbozar la anatomía de una burbuja.

Stage 1 sees “displacement”. Frequently, this comes about through the introduction of a new disruptive technology (e.g. canals, railways, or the internet) although Kindleberger says it doesn”t necessarily have to come from such an innovation. It can arise on the back of greater market liquidity through, for example, financial deregulation.
Stage 2 is the “boom.” A convincing narrative gains traction (e.g. Asian economies are “miracle” Tiger economies; the Internet will change the world; sub-prime mortgages help financial institutions diversify risk). Price movements which seem to confirm the narrative are stoked by credit creation.

Stage 3 is “euphoria.” In the words of Kindleberger, “there is nothing so disturbing to one’s well-being and judgement as to see a friend get rich.” This greed sucks people who wouldn’t normally involve themselves in such practice into the mania. More and more people seek to become rich without understanding the process involved. Rationality becomes stretched and increasingly fanciful notions excuse what would ordinarily be considered irrational behaviour.

Stage 4 sees the “crisis.” The insiders originally involved start to sell. Prices level off and begin to fall. Those who bought at the top find themselves pushed out first and their selling eventually cascades down through the remaining believers. Speculators realise prices can no longer rise and the rush to exit is on. To the extent that leverage was used to finance any purchases at irrationally overvalued prices, savage price declines put banks in trouble too.

Stage 5 sees “revulsion” where prices likely overshoot fundamental values on the downside. Scams and frauds are uncovered. Scapegoats are found for the financial distress caused object so richly desired as the bubble inflated becomes an object of ridicule and disgust, along with anyone or anything associated with it.