Bubbles and Contagion in Financial Markets, Volume 1: An Integrative View (An Integrative View, 1)

"Asset bubbles and contagion have had a profound effect on the financial markets after the financial and sovereign debt crises. This book takes a quantitative approach to examining these phenomena and will appeal to practitioners who need to understand the repercussions of these events on trading exchanges and the markets"-- Provided by publisher Understanding the formation of bubbles and the contagion mechanisms afflicting financial markets is a must as extreme volatility events leave no market untouched. Debt, equity, real estate, commodities... Shanghai, NY, or London: The severe fluctuations, explained to a large extent by contagion and the fear of new bubbles imploding, justify the newly awaken interest in the contagion and bubble dynamics as yet again the world brazes for a new global economic upheaval. Bubbles and Contagion in Financial Markets explores concepts, intuition, theory, and models. Fundamental valuation, share price development in the presence of asymmetric information, the speculative behavior of noise traders and chartists, herding and the feedback and learning mechanisms that surge within the markets are key aspects of these dynamics. Bubbles and contagion are a vast world and fascinating phenomena that escape a narrow exploration of financial markets. Hence this work looks beyond into macroeconomics, monetary policy, risk aggregation, psychology, incentive structures and many more subjects which are in part co-responsible for these events. Responding to the ever more pressing need to disentangle the dynamics by which financial local events are transmitted across the globe, this volume presents an exhaustive and integrative outlook to the subject of bubbles and contagion in financial markets. The key objective of this volume is to give the reader a comprehensive understanding of all aspects that can potentially create the conditions for the formation and bursting of bubbles, and the aftermath of such events: the contagion of macro-economic processes. Achieving a better understanding of the formation of bubbles and the impact of contagion will no doubt determine the stability of future economies – let these two volumes be the starting point for a rational approach to a seemingly irrational phenomena. "Cover"--"Bubbles and Contagion in Financial Markets, Volume 1"--"Contents" -- "List of Tables and Figures" -- "Preface" -- "Acknowledgments" -- "List of Acronyms" -- "1 Introduction to Bubbles and Contagion" -- "1.1. Current situation" -- "1.2. Definitions" -- "1.2.1. Contagion definition" -- "1.2.2. Bubble definition" -- "1.3. Brief history and analysis of some bubbles" -- "1.3.1. Tulip Mania" -- "1.3.2. South Sea Bubble (1719â#x80;#x93;1720)" -- "1.3.3. Railway Mania" -- "1.3.4. Dot-com Bubble" -- "1.3.5. The housing bubble" -- "1.4. Causes of bubbles and contagion" -- "1.4.1. Conditions" -- "1.4.2. Bounded rationality" -- "1.4.3. The financial accelerator" -- "1.4.4. Herding" -- "1.4.5. Trade linkages" -- "1.4.6. Financial linkages" -- "1.5. The life cycle of a bubble" -- "1.5.1. Phases of a bubbleâ#x80;#x99;s life cycle" -- "1.5.2. Resulting misallocations" -- "1.5.3. Balance-sheet recession" -- "2 Macro â#x80;#x9C;Playersâ#x80;#x9D; in Bubble Formation and Contagion Processes" -- "2.1. Monetary and fiscal policy" -- "2.2. Credit, global flows, and the repricing of risk" -- "2.3. Connectivity, systemic risk sharing, and transmission mechanisms" -- "2.3.1. Connectivity and exposures" -- "2.3.2. The financial acceleratorâ#x80;#x99;s role in the transmission of crises" -- "2.3.3. Economic instability and financial risk" -- "2.3.4. Systemic risk and transmission mechanisms" -- "2.3.4.1. Creditor/depositor runs" -- "2.3.4.2. Information-induced bank runs" -- "2.3.4.3. Collateral/margin runs" -- "2.3.4.4. Loss spiral" -- "2.3.4.5. Margin/haircut or leverage spiral" -- "2.3.4.6. Contagion and flight to safety" -- "2.3.4.7. Lendersâ#x80;#x99; limitations" -- "2.3.4.8. Network externalities" -- "2.3.4.9. Feedback effects between financial sector risk and sovereign risk" -- "3 Contributors to the Bubble Formation and Contagion Process" -- "3.1. Market imperfections." Bubbles and Contagion in Financial Markets provides an introduction to the important topic of asset bubbles and contagion, two key precursors to financial crashes. Interest in market microstructure, market interrelations and contagion has risen sharply following on from the financial crisis and the sovereign debt crisis, and both practitioners and academics are showing increased interest in quantifying and potentially modeling bubbles and contagion effects. This book provides a technical but accessible introduction to bubbles and contagion. While other books in the market report historical episodes, the author instead focuses on the patterns and schemes that can be derived from historical analysis to develop models and a more comprehensive systematized analysis of the phenomena. In volume 1 of 2, the author introduces the background concepts and underlying theory of the topic, exploring macro policy considerations, the role of technical trading and of psychological trading biases, market interconnections, cascade effects and valuation - al; with a focus on readers developing a complete, intuitive understanding of the breadth and depth of the issues and challenges inherent to the area. Although some quantitative aspects will be examined for context, the mathematics of asset bubbles will be explored more thoroughly in volume 2. Bubbles and Contagion in Financial Markets will be a welcome addition to the growing body of literature in and around market microstructure and high frequency finance, and will prove a popular reference for practitioners in trading and quantitative modeling, as well as researchers in academia, who will gain a comprehensive understanding of asset bubbles and the contagion effects of market crashes, and the quantitative aspects involved Front Matter....Pages i-xviii Introduction to Bubbles and Contagion....Pages 1-30 Macro “Players” in Bubble Formation and Contagion Processes....Pages 31-54 Contributors to the Bubble Formation and Contagion Process....Pages 55-89 Bubbles versus the Valuation of Fundamentals....Pages 91-126 Bubbles and Technical Trading....Pages 127-171 Contagion....Pages 173-199 Bubbles....Pages 201-235 Back Matter....Pages 237-289