CFA Institute Research Foundation Publishes Bursting the Bubble: Rationality in a Seemingly Irrational Market

The CFA Institute Research Foundation, a research arm of CFA Institute which sponsors independent, in-depth research on investment management issues, announces today the publication of Bursting the Bubble: Rationality in a Seemingly Irrational Market. The new monograph provides insights by economist David DeRosa, who reviews and evaluates the academic literature about the presence of speculative bubbles in capital markets - an important area of interest in financial history. Bursting the Bubble poses two main questions: whether there is convincing empirical evidence that bubbles exist, followed by an investigation into whether the theoretical concepts that have been advanced for bubbles make them plausible.

Rhodri Preece, CFA, Senior Head of Research at CFA Institute, comments: "We are delighted to be adding this new publication by the CFA Institute Research Foundation to the literature on market bubbles, a concept that continues to capture the attention of investors. This independent and thought-provoking body of research makes a key contribution to the debate on bubbles among both the academic and practitioner communities. It will become an authoritative resource in this fascinating area of finance for years to come.”

Bubbles are thought to be found primarily in the stock market, which is the main area of interest for this publication, and they tend to go hand in hand with the notion that markets can be irrational. The academic community has a great interest in bubbles, and much scholarly literature has been produced on the topic. Bubbles would contradict the ideas that markets are rational or work in an informationally efficient manner, and that is what makes the topic of bubbles ever-compelling.

From studying the literature and from reading history, DeRosa finds that many famous purported bubbles – from Dutch Tulipmania in the 1630s and the British South Sea Bubble of 1720, to the Dotcom bubble of the late 1990s – reflect inaccuracies in analysis, or in certain cases simply cannot be shown to have existed. In other instances, bubbles might have existed, but in each of those cases, there are credible rational explanations. And good evidence exists for the idea that even if bubbles do exist, they are not of great importance to understanding the stock market.

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