Purpose – The purpose of this paper is to clarify the concept of bubble, what it means to explain a bubble and propose a list of bubble indicators.
Design/methodology/approach – The paper is based on a literature review and some philosophical ideas to derive conclusions for the problems studied.
Findings – A price bubble should be defined only in relation to the development of prices: a dramatic increase immediately followed by a dramatic fall. The traditional definition in terms of prices not determined by fundamentals is problematic primarily because the concept “fundamentals” is vague. A bubble can never be explained by a single factor, but is the result of the interaction of a number of factors. The explanatory factors proposed are used to derive a set of indicators working as warning signals whether a dramatic increase in prices will be followed by a dramatic fall. The list developed covers, for example, interest costs in relation to household incomes, the elasticity of supply, price expectations and credit conditions.
Research limitations/implications – Both the explanatory framework and the list of indicators should be seen as preliminary and the starting point for further development through empirical testing.
Practical implications – A developed list of bubble indicators could be useful for a number of actors, e.g. banks and authorities responsible for monitoring financial stability.
Originality/value – The contribution is a clearer and more useful concept of bubble, a clearer separation of the question whether bubbles exist and how they should be explained. The proposed list of indicators goes far beyond earlier indicators.
2009. Vol. 2, no 1, 78-90 p.