SS111 makeup work 5.2.pdf - SS111 makeup work 5.2 In this class we mainly discussed the causes of a bubble which is the deviation of an asset\u2019s price

SS111 makeup work 5.2.pdf - SS111 makeup work 5.2 In this...

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SS111 makeup work 5.2 In this class we mainly discussed the causes of a bubble, which is the deviation of an asset’s price from its fundamental value, and how to mitigate the bubbles. The most prominent LO was #maniabubblescrises , it’s important to be aware that bubbles are hard to be identified before hand, and it has systemic risks to damage the financial system through contagion effect. The bubble bursts when excessive risk-taking becomes pervasive throughout a certain system. When the demand decreases while supply increases, it will result in a fall in prices. Bubbles happen when a certain product is overvalued from where it should be. Economic bubbles burst when the overvaluation reaches a point where the price cannot be sustained. An example of this happened in 2006 when the housing market crashed. The banks and the government made credit way too easy to obtain which created over valuations which couldn’t be maintained. This is because a certain level of demand is needed to maintain a valuation. Since credit is required to be paid back, this forced people to cut back on their demand in order to pay it off. The second factor which caused this bubble was speculative investing. When investors are disconnected from
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