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Price bubbles and financial markets efficiency

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  • Doncho Donev

Abstract

This article presents the development of investment theories after the age of the prevailing Modern Portfolio Theory and Capital Asset Pricing Model. It starts with a review of the main theoretical and empirical presumptions of the Efficient Market Hypothesis. The emergence of behavioral finance is monitored, focusing on its contribution to the investment theory and practice. A special attention is paid on the speculative price bubbles. The paper reveals the prerequisites for their emergence, the phases through which a typical price bubble passes, and the methods for calculation of the probability for their collapse. The securities with an infinite maturity are highlighted. An example for a price bubble on the Bulgarian Stock Exchange is investigated in details. Therefore the historical performance of the main Sofix stock index is examined.

Suggested Citation

  • Doncho Donev, 2017. "Price bubbles and financial markets efficiency," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 115-131.
    • Handle: RePEc:bas:econth:y:2017:i:1:p:115-131
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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