Question

1. Explain how a bubble can develop in the market for an asset.

Answer 1

1. Asset bubbles are created when the price of an asset such as stocks, gold rise to such a level that they become over- inflated. As the prices rise over a very short period of time , there is no underlying demand supporting the demand. the price of the asset rise above the fundamental value and reach such levels which are not sustainable. This generally happens when all the investors flock to a particular asset class, it is also knows as the asset inflation.

As, the prices rises above sustainable levels , any of the triggers eventually cause the bubble to burst and there is a downward pressure on the prices.

reasons behind the asset bubble is shortage of supply, investors pump money in one particular asset class, thinking that there is shortage of supply and the asset class will eventually run out they panic and pump money into it. An asset class gets popular among the investors , as investors want to buy more and more of it.

An asset bubble took place in real estate market in 2005.