Wharton Professor Grace Wong analyzed transaction volumes and other factors potentially contributing to speculative bubbles, focusing on the fluctuation of prices in Hong Kong real estate. Her study suggests possible tools to detect speculative activities in cyclical markets, in time for regulators to act before damaging collapses.
Her study looked at and discounted the influence of various fundamental factors (e.g. interest rates, inflation, population growth, tax changes) sometimes offered to explain price spikes. She also considered historical bubbles, including the Tulip Craze of the 17th century and the tech stock bubble of more recent years. She derives some of her tools from work done by Scheinkman and Xiong in "Overconfidence and Speculative Bubbles." (2003) and "Speculative Trading and Stock Prices: An Analysis of China's A-B Share Premia." (2004).
Question: might Wong's studies be of value in understanding insurance price cycles and "crises" such as that in the medical malpractice sector? Can such recurring "crises" be seen as the analog of the inevitable "crash" following a speculative bubble in a real estate market, fueled by overconfidence? In insurance markets, the "crash" phase is manifested in suddenly rising prices as markets over-react to the excesses of the bubble of "exuberance," instead of the falling prices that evidence a "crash" in other financial markets? Is the regulatory attention better aimed at preventing the exuberent speculation or the over-reaction that naturally follows?
Attention, Speculators: Here's a Lesson from Hong Kong's Housing Bubble - Knowledge@Wharton
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Abstract: The Hong Kong residential housing market index (CentaCity Index) experienced a real increase of 50 percent from 1995 to 1997, followed by a real decrease of 57 percent from 1997 to 2002. Using a panel data set of over 200 large-scale housing complexes (estates), increases in transaction volume and considerable cross-sectional variation in the size of price upswings are documented. Movements in fundamentals cannot fully justify the dramatic price upswing, the changes in turnover rate or the crosssectional variation. The non-fundamental price component is explored. Evidence consistent with overconfidence-generated speculation is provided, based on the model in Scheinkman & Xiong (2003), which predicts both a cross-sectional variation in the speculative price component, and co-movements in turnover rates.
Posted by dougsimpson at May 4, 2005 08:57 PM