"The experience with Internet stocks since the start of 1998 is
another illustration of a speculative bubble (i.e., a situation in which
high prices are sustained largely by investors enthusiasm rather than by
consistent estimation of real value). By the end of March 2000, the CBOE
(Chicago Board Options Exchange) Internet Index reached a peak of over
seven times the level it had been at the beginning of 1998. By the end of
2000 it was down to about one and a half times that level. At the peak, the
levels were extraordinary compared to any discounted cash flows that the
firms might have been expected to generate. In recent weeks, it has been
common in the press and other places to start referring to this sequence of
events as the "Internet bubble." (Allen)
The main objective of the report is to focus on the asset pricing
phenomena known as "bubbles." This report will review and attempt to
summarize some of the more well known bubbles of investment history such
as:
• Tulip-Bulb Craze
• The South Sea Bubble
• The Florida Real Estate Craze
• The Nifty-Fifty Era
• The Japanese Equity Bubble of the 1980s
• U.S. dot.com Mania of the 1990s
This report will then try to answer various stock market related
questions such as how long it takes the average stock market price to
return to a pre-crash level on a major sell off. Then the report will look
at what it takes to avoid getting sucked in to the vortex of a future
bubble because the biggest problem is that history repeats itself.
Introduction
Through this report I will try to present an integration of the modern
theory of corporate finance and sprinkle in some contemporary financial
developments so as to present the true big picture in the investment world.
I will also ex...