The classification and identification of asset price bubbles

Abstract

This article briefly summarizes approaches to and options for identifying bubbles in asset prices. Further, the article draws on bubble literature and it theoretically discusses classification of asset price bubbles according to features as differences in rationality of investors, their informational (a)symmetry, limits in arbitrage and heterogeneous beliefs. It also highlights the identification problems related with determining the fundamental value of an asset. We argue that disequilibrium asset price is a necessary but not sufficient condition for finding a bubble in a given asset. The market and country specifics have to be borne in mind. The article also specifies the procedure for monitoring and early identification of asset price bubbles. We recommend using all available spectrum of tools in the most effective arrangement ranging from charting methods (trends, filters, price-to-income ratios) via one-equation fundamentals based models to complex and structurally rich models.