Asset Price Booms, Busts and Financial Crises

While historical market busts and financial crises are usually preceded by asset price booms, booms may not necessarily be predictive of busts or crises, given the rarity of these adverse events in history. This paper therefore aims to study the ability of asset price booms in the stock and the housing market to predict asset market busts as well as financial crises. This paper replicates Goetzmann’s 2015 study of global stock market bubbles, showing that the probability of a bust conditional on a boom is only slightly higher than the unconditional probability. Based on empirical evidence drawn from global market data, this paper also extends the conclusion from the stock market to the housing market, as well as from asset price busts to macroeconomic financial crises. In other words, stock and housing price booms are not strong indicators of impending busts or financial crises.