Fear and stock price bubbles.

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  • Author(s): Lehnert T;Lehnert T
  • Source:
    PloS one [PLoS One] 2020 May 12; Vol. 15 (5), pp. e0233024. Date of Electronic Publication: 2020 May 12 (Print Publication: 2020).
  • Publication Type:
    Historical Article; Journal Article
  • Language:
    English
  • Additional Information
    • Source:
      Publisher: Public Library of Science Country of Publication: United States NLM ID: 101285081 Publication Model: eCollection Cited Medium: Internet ISSN: 1932-6203 (Electronic) Linking ISSN: 19326203 NLM ISO Abbreviation: PLoS One Subsets: MEDLINE
    • Publication Information:
      Original Publication: San Francisco, CA : Public Library of Science
    • Subject Terms:
      Commerce*/history ; Models, Economic*; Euphoria ; Fear ; History, 20th Century ; History, 21st Century ; Humans ; Risk-Taking ; United States
    • Abstract:
      I evaluate Alan Greenspan's claim that stock price bubbles build up in periods of euphoria and tend to burst due to increasing fear. Indeed, there is evidence that e.g. during a crisis, triggered by increasing fear, both qualitative and quantitative measures of risk aversion increase substantially. It is argued that fear is a potential mechanism underlying financial decisions and drives the countercyclical risk aversion. Inspired by this evidence, I construct an euphoria/fear index, which is based on an economic model of time varying risk aversion. Based on US industry returns 1959-2014, my findings suggest that (1) Greenspan is correct in that the price run-up initially occurs in periods of euphoria followed by a crash due to increasing fear; (2) on average already roughly a year before an industry is crashing, euphoria is turning into fear, while the market is still bullish; (3) there is no particular euphoria-fear-pattern for price-runs in industries that do not subsequently crash. I interpret the evidence in favor of Greenspan, who was labeled "Mr. Bubble" by the New York Times, and who was accused to be a serial bubble blower.
      Competing Interests: The author has declared that no competing interests exist.
    • References:
      J Pers Soc Psychol. 2001 Jul;81(1):146-59. (PMID: 11474720)
    • Publication Date:
      Date Created: 20200513 Date Completed: 20200731 Latest Revision: 20200731
    • Publication Date:
      20240105
    • Accession Number:
      PMC7217470
    • Accession Number:
      10.1371/journal.pone.0233024
    • Accession Number:
      32396567