Possible Element of Equity Bubbles

The famous speculator, a demon in Asians' view, and later philanthropist, George Soros once said that stock market bubbles must be based on reality. As more and more people get involved, it gets crazier than reality can provide, like a party where you just want to call everyone over for a few drinks and talk about philosophy and religion while everyone dances excitedly over the alcohol as a catalyst, it won't stop until someone fell off the balcony, then others realized what they were here for at the beginning.

The table below summarizes the details of the tradable bubble:

Name	Environment	Motivation	Duration	Begin	End
Cryptocurrency	After 2008, the public distrusted banks and governments	Bitcoin promises an anonymous, decentralized system.  U.S. Keeps Interest Rates Low	Many times Average of one to two years	Cryptocurrencies are traded all over the world, it's hard to say what's driving them	Countries are stepping up regulation. The crash of 2017 was China's ban on cryptocurrency trading.
Subprime mortgage crisis	The federal government encourages the lower class to buy homes	Financial institutions issue housing loans to people with low credit. The media's housing promotional videos stimulate people	3 years	The start of government action	Lehman Brothers went bankrupt
Dotcom Ref	The World Wide Web and the PC are popularized. Since 1998, the Fed has lowered interest rates, and the economy has shown vitality	Short selling restrictions and high fees for Internet stocks. Significant reduction in brokerage fees, and trend trading.	3 years	Technology company IPOs have increased significantly	As the lockup period for insiders ends, they chose to sell.
China's Two Bull Markets	China's accession to the WTO requires reforms in accordance with international requirements.	The government sells its holdings heavily to the public and many IPOs	both 1 year	The media encouraged people to buy stocks	Government cracks down on margin trading, deems many institutions illegal
Japanese asset price bubble Ref	Plaza Accord， Interest Rates Slashed, Government Relaxes Listing Requirements	The government encourages people to buy land, and people are keen to trade stock index futures	5 years	The government lowers interest rates and encourages	In 1990, the government carried out total control on land finance, and banks adopted austerity policies
1920 Great Depression in the United States Ref	The power industry is booming, and the economy is growing very fast. Investment trusts allow retail investors to buy portfolios	Higher earnings and dividends, inexperienced investors entering the market, using broker loans to purchase securities	3 years	Index up 15% in two months	Black Thursday & Black Tuesday, the index falls vertically. Margin requirements rose sharply beginning in October 1928. Substantial IPO
1840s British Railway Stock	More than 500 railway plans were submitted to the British Parliament, and steam power technology was popularized	Government imply railway stocks are profitable.	2 years	Introduction of the Railway Act	Bank of England rate hike. Media criticism of rail boom.

Through the table above, we can notice some commonalities.

Almost all bubbles support the bubble triangle theory claimed by Quinn, W., & Turner, J. (2020), that is, speculation, the improvement of sales capacity (Marketability), the loosening of money and credit, and the catalysts are technological innovations and government policies. It is strongly recommended using this triangle for judging bubble environments.

Figure 5: The Bubble Triangle 

At the same time, there are other features associated with the bubble, and from a rigorous point of view, we cannot be sure whether a causal relationship exists.

u  Economic prosperity

In addition to cryptocurrency, all others have seen pre-crisis booms. It can also be said that without the previous prosperity, how could there be a crisis.

u  Invention of new technologies. 

Decentralized digital currency system, World Wide Web, Edison light bulb, steam engine. Even Robinhood's zero-commission trading also creates wall street bet.

u Changes in the financial system. Before the subprime mortgage crisis, financial institutions covered low-income classes with housing loans, mortgage-backed securities, margin trading, and loans to buy stocks 150 years ago.

uGovernment

Japan, China, the United States, the United Kingdom, many others have emerged, and it is difficult to determine whether the government has acquiesced in the creation of the bubble.

uMedia, the mouth of the government. 

The Conservative Party, the Democratic Party, the Republican Party, and the socialist media are all implementing government orders to guide public behaviour.

uRestrictions on short selling of the asset, or difficult to do so.

For example, for houses in the subprime mortgage crisis, only institutions can do credit default swaps. There are also short-selling restrictions on tech stocks. Short selling is a problem in many countries.

Figure 6: During two stock bubbles, Hong Kong's Hang Seng Index rose much less than the Shanghai Composite Index, possibly because of the lack of short-selling mechanisms in mainland China

uPublic optimism

Few thought the boom would be busted.