An overview of potential financial bubbles in the US financial markets

Abstract

Financial bubbles have presented a challenge for the financial markets for a long time and caused steep losses for many investors. This thesis has two main goals relating to financial bubbles. The first is to try to determine if it is possible to find out if a financial bubble is forming. To accomplish that, the economic theories that govern bubble formation and burst are analyzed and the models that exist to predict bubble formation are discussed. A new model is suggested and is applied in the US financial markets to determine if any of the asset classes are currently risking the development of a bubble. This analysis suggests that one asset class is likely to be developing a bubble and this thesis further discusses this asset class. The second objective of this thesis is to suggest alternatives that prudent investors could introduce to protect themselves from some of the worst consequences of bubbles. This thesis will suggest models inspired by completely different industries: the air transportation industry with its high safety standards; the oil industry with its long-term planning; and the socially responsible investment industry, with its self-regulatory structure.