ASSET BUBBLES: THEIR IMPORTANCE, IDENTIFICATION, AND IS THERE A BUBBLE IN GOLD?

Open Access
Author:
Chen, Chris Yi Chun
Area of Honors:
Economics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Russell Paul Chuderewicz, Thesis Supervisor
  • David Shapiro, Honors Advisor
Keywords:
  • Vector Autoregression Analysis
  • VAR Technique
Abstract:
Without a doubt, bubbles in asset prices, whether real or nominal, have reemerged as an important point of discussion amongst policy makers and the public alike. This is not surprising given that 1) there is widespread agreement that a bubble had formed in the housing market and 2) the bursting of the bubble has resulted in the most severe downturn in the US and world economies since the Great Depression. The Federal Reserve has admittedly taken the stance that asset bubbles are too difficult to identify and too costly to ‘prick’ even if you could identify them. The most recent bursting of the housing bubble and its damage to the global economy has the Federal Reserve re-evaluating its position on asset price stability, and perhaps thinking hard about being more proactive in managing asset bubbles. This being the case, the first step is to be able to identify bubbles as they are forming, and then deliberate as to the appropriate policy. This paper builds on the work by Dokko et al. (2009), where they use conditional forecasts from a vector autoregression to identify the bubble in the housing market. Employing the same methodology, we identify a (current) bubble in gold prices and given the reemergence in the interest in bubble management, this methodology can be used by policymakers to identify bubbles in other assets.