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mktefficiency - O u tlin e M a r k e t E f c ie n c y a n d...

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1 Market Efficiency and Bubbles Economics 71a: Spring 2007 Lecture notes 4.9 Malkiel: 6-8, 11 Outline Bubbles Market efficiency Final advice Bubbles (some examples) Tulips South Sea US Stocks 29 US Stocks 60 s Japan (80 s) Internet (90 s) Tulips Holland 1593-1637 Tulips infected with virus Causes spectacular colors in infected tulips These are relatively rare
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2 Prices Tulip prices soar Everyone gets interested in the tulip craze Half pound of Witte Croonen went from 64 guilders 1/2 lb to 1668 from Jan to Feb 5th 1637 Back to 37 in 1642 One Semper Augustus goes for $50,000 worth of gold The end: 1637 Bulb prices collapse Holland goes into a recession Was it a bubble, compare to today? Mass hysteria Prices moving for no apparent reason South Sea Bubble England early 1700 s South Sea company given trade monopoly rights Company issues stock, but it is not able to make money Meanwhile in France Mississippi company starts Large conglomerate South Sea stock takes off The end of South Sea August 1720 Directors of South Sea Sell Panic Government forbids stock certificates until 1825
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3 Fun Quote: Sir Isaac Newton Newton was one of the losers in the South Sea Bubble “I have learned to predict the movement of celestial bodies but not the movement of man in markets.” 3. The Crash of 29 March 1928-Sept 1929 Market increase equals 23-28 Everyone gets involved Two features Margin purchases
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