Financial Crises: Explanations, Types, and Implications; by Stijn Claessens and M. Ayhan Kose; imf working Paper 13/28; January 1, 2013

A.   Asset Price Booms and Busts 

Sharp increases in asset prices, sometimes called bubbles, and often followed by crashes 

have been around for centuries. Asset prices sometimes seem to deviate from what 

fundamentals would suggest and exhibit patterns different than predictions of standard 

models with perfect financial markets. A bubble, an extreme form of such deviation, can be 

defined as “the part of a grossly upward asset price movement that is unexplainable based on 

fundamentals” (Garber, 2000). Patterns of exuberant increases in asset prices, often followed 

by crashes, figure prominently in many accounts of financial instability, both for advanced 

and emerging market countries alike, going back millenniums (see Evanoff, Kaufman, 

Malliaris (2012) and Scherbina (2013) for detailed reviews of asset price bubbles).  

                                                 

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 Related are such concepts as “reflexivity” (Soros, 1987), “irrational exuberance” (Greenspan, 1996), 

and “collective cognition” (De La Torre and Ize, 2011). 

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Some asset price bubbles and crashes are well known. Such historical cases include the 

Dutch Tulip Mania from 1634 to 1637, the French Mississippi Bubble in 1719-20, and the 

South Sea Bubble in the United Kingdom in 1720 (Garber, 2000; Kindleberger, 1986). 

During some of these periods, certain asset prices increased very rapidly in a short period of 

time, followed by sharp corrections. These cases are extreme, but not unique. In the recent 

financial crisis, for example, house prices in a number of countries have followed this inverse 

U-shape pattern (Figure 1).