Essays on bubbles in financial markets

• Main Author: Peng, Congmin
• Published: University of Essex 2014
• Subjects: 332.63
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.635991

This thesis consists of three substantial chapters on topics related to bubbles in financial markets, an Introduction and Conclusion. A sharp increase in Chinese house prices combined with the extraordinary lending growth during the 2000s has led to concerns of an emerging real estate bubble. The first essay studies (nominal and real) house prices relative to fundamental house values. Housing constitutes a large fraction of most household portfolios and its characteristics are in contrast to what prevails in most financial markets as arbitrage is limited and hence correction toward fundamental values can be a prolonged process. Using a time-varying present value approach, our findings suggest evidence of bubbles in the Chinese housing market nationally and in representative cities using both nominal and real data. We also find that price dynamics have an important role to play in determining house prices. Moreover, the results reveal that the dominant driving force of house price deviations from fundamental values might be the less than fully rational behaviour of investors rather than fundamental factors. This seems plausible in an emerging market such as China.