[Author: Ben Chou, New Jersey Institute of Technology]
The damage wrecked by the bursting of asset bubbles can have a devastating impact on investors' fortunes and the welfare of a society. Krueger (2005) points out that the rise and fall of internet stock prices during the internet bubble destroyed about $8 trillion of shareholders’ wealth. More recently, the bursting of the housing bubble and toxic financial assets created worldwide financial crises, impacting many nations and their economies. Therefore, understanding the recent developments in the techniques of identifying asset bubbles is an important first step for researchers and policy makers to develop preemptive policy measures to ameliorate the negative impacts of speculative bubbles before they get too big and collapse.