Daily Traders Edge

Opinion: The stock market’s plunge isn’t the sound of a bubble bursting

February 06
11:28 2018

Whatever it is that’s bringing the stock market down sharply, it’s not the bursting of a bubble. That’s because the recent market — overheated and overvalued as it has been — doesn’t even come close to past market bubbles.

And the stock market’s plunge over the last week — more than 2,000 points on the Dow Jones Industrial Average DJIA, -0.34%  on an intra-day basis — also doesn’t compare to the carnage of a bubble bursting.

That at least is what I conclude from academic research into the precursors of past market bubbles.

Consider first a study that was published in 2006 by Malcolm Baker, a finance professor at Harvard Business School, and Jeffrey Wurgler, a finance professor at NYU. They devised a number of objective indicators of irrational exuberance that, in backtesting, were highly correlated with bubbles such as the 1929 stock market crash and the bursting of the Internet bubble in early 2000.

Continue Reading at Market Watch

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