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Credit market bubble building? A forming credit bubble could burst by 2017
Abstract
Bubble theories and concerns are becoming quite common these days for several asset classes, prompting discussions and warnings, including those from regulators. We now come to some key questions—are we in the midst of an inflating credit bubble and, if so, when is it likely that the bubble will burst? Contrarily, are we experiencing an extended period of opportunistic debt financing—a theory made popular amongst corporate finance theorists going back to at least the 1960s and 1970s. The evidence we have compiled leads us to conclude that, indeed, a bubble is building, but it is not likely to explode dramatically, with a significant increase in corporate bond and loan defaults, until at least late 2016 or more likely in 2017–2018. Fear, however, of a potential crisis in credit and equity markets, or major dislocations in important industries or countries, may contribute to periods of negative price movements and increased volatility in these, and other, asset classes before the bubble actually bursts.
... Further, (Aasen, 2011) executed a similar study on the Oslo stock exchange listing and bubble behaviors of some of its assets. For their part, (Kasman and Carvallo, 2014) produced a similar study, but on Latin America and the Caribbean; (Altman and Kuehne, 2016) executed a similar study in the case of the bond bubble and (Bovet et al., 2018) carried out a study on the specific case of Bitcoin. A study by ) focused on bubble behaviors over 26 representative economies for a period between 2000 and 2014. ...
A number of financial bubbles have occurred throughout history. The objective of this study was to identify the main similarities between Bitcoin price behavior during bubble periods and a number of historical bubbles. Once this had been carried out, we aimed to determine whether the solutions adopted in the past would be effective in the present to reduce investors’ risk in this digital asset. This study brings a new approach, as studies have previously been conducted analyzing the similarity of Bitcoin bubbles to other bubbles individually, but these were not conducted in such a broad manner, addressing different types of bubbles, and over such a broad time period. Starting from a dataset with 9967 records, a combined methodology was used. This consisted of an analysis of the standard deviations, the growth rates of the prices of the assets involved, the percentage increase in asset prices from the origin of the bubble to its peak and its fundamental value, and, finally, the bubble index. Lastly, correlation statistical analysis was performed. The results obtained from the combination of the above methods reveal the existence of certain similarities between the Bitcoin bubbles (2011, 2013, 2017, and 2021) and the tulip bubble (1634–1637) and the Mississippi bubble (1719–1720). We find that the vast majority of the measures taken to avoid past bubbles will not be effective now; this is due to the digital and decentralized nature of Bitcoin. A limitation of the study is the difficulty in making a comparison between bubbles that occurred at different historical points in time. However, the results obtained shed light and provide guidance on the actions to be taken by regulators to ensure the protection of investors in this digital asset.
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