What is a Speculative Bubble
A speculative bubble is a spike in asset values within a particular industry, commodity, or asset class that is fueled by speculation as opposed to fundamentals of that asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This speculation and resulting activity drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest.
The bubble is not completed until prices fall back down to normalized levels. It is said to pop when there is a period of steep decline in prices, during which most investors panic and sell out of their investments.
May also be referred to as a "price bubble" or "market bubble."
BREAKING DOWN Speculative Bubble
Speculative bubbles have a long history in world markets. The progression of time along with economic and technological advances has not slowed their arrival. In fact, the 2001 tech bubble was spurred on by technological advances and the advent of the internet. In 2008, the popping of the real estate bubble, along with the collapse of other real estate related asset-backed securities, helped usher in the global financial crisis. In our modern financial markets, speculators can often make profitable bets when speculative bubbles burst by purchasing derivatives or shorting securities directly.
While each speculative bubble has its own driving factors and variables, most involve a combination of fundamental and psychological forces. In the beginning, attractive fundamentals may drive prices higher, but over time behavioral finance theories suggest that people invest so as to not "miss the boat" on high returns gained by others. When the artificially high prices inevitably fall, most short-term investors are shaken out of the market after which the market can return to being driven by fundamental metrics.