Netunaev E.B. STOCK BUBBLE LIFE-CYCLE AT EMERGING MARKETS AND STABILIZATION POLICY TUNING

DOI: https://doi.org/10.15688/jvolsu3.2018.3.10

Evgeniy B. Netunaev

Leading Consultant of Business Valuation Department, Baker Tilly Rus Consulting JSC; Postgraduate Student, Lomonosov Moscow State University, Khoroshevskoe shosse, 32A, 123007 Moscow, Russian Federation, This email address is being protected from spambots. You need JavaScript enabled to view it. .


Abstract. Financial bubble on stock market (henceforward the stock market bubble) stays among the biggest challenges to economists. Its inflations and bursts damage financial system as well as the wider economy. Thisdemands anti-bubble measures, whose efficiency however depends on their compliance with propagation mechanisms at different bubble life-cycle stages. The paper suggests original model of stock market bubble life cycle that takes due account of developing markets. Stage separation is based on the ratio of rational (professional) investors to irrational (inexperienced) ones. We argue that there are irrational investors who inflate stock market bubbles with their over-optimistic expectations. Their congruent behavior incentivizes both themselves and their rational peers to adopt speculative strategies even though the bubble appears. We develop the interaction algorithm for rational and irrational investors to identify five principle stages of stock market bubble life cycle. We prove that each stage provides for idiosyncratic stabilization measures. For example, the first stage, when not yet the bubble but its precondition matures, imposes indirect passive measures (e.g. stricter disclosure requirements for investment fund managers). The second and the third stages conversely involve direct active measures like verbal interventions and restrictions on trade operations for particular subgroups of investors. Monetary instruments may also come into play at the third stage, but in a supportive role.

Key words: financial bubble, stock market, emerging countries, stock bubble life-cycle, stock market stabilization policy.

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