The Journal of Portfolio Management
Asset bubbles and their subsequent bursts are nothing new. Indeed, they have been a part of capital markets since modern capital markets began to evolve in the 17th century. While each bubble environment has its own distinguishing characteristics, most bubbles share certain common elements — financial innovation, the emotions and psychology of investors, and leverage.
They often begin with a focused innovation that initially benefits society at large but then draws speculators who leverage themselves in hopes of achieving even greater success. Increased complexity and unfounded claims soon take over, and a market imbalance emerges.
Eventually, the bubble bursts, inflated asset prices rapidly fall, the previously “infallible” innovation is placed in context, and investor rationality returns. These lessons, however painful, will hopefully provide the foundation for enlightenment and strength in the future.
One key is a strong, yet flexible, oversight framework having the goal of identifying and containing areas of excessive economic risk.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.
This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.