What is a financial bubble?

What is a financial bubble?

A financial bubble is an economic period in which the prices of particular types of assets increase in an exaggerated way, strongly exceeding their intrinsic value, only to contract later, when the bubble burst.

It is usually originated by an exuberant bullish market and it ends when no more investors or speculators are willing to buy the asset involved in the bubble at its price; it happens then that the price itself collapses because of the large number of assets sold on the market in the same moment.

Probably the first financial bubble is the so-called Tulip mania, happened in the Netherlands between 1634 and 1637, when the price of the bulbs of tulips increased in an irrational and incomprehensible way.

Other examples of bubbles in History include the dot-com bubble between 1995 and 2001, that involved the share prices of thousands of Internet companies, the Japanese bubble, happened in the later 1980s and early 1990s, when the prices of stocks and real estate properties skyrocketed, and the housing bubble started in the United States only ten years ago, which has been the major cause of Great Recession of 2007-2008.

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