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Stock market bubbles arise as a joint monetary and financial phenomenon. We assess the potential of monetary policy in mitigating the onset of bubbles by means of a Markov-switching Bayesian Vector Autoregression model estimated on US 1960–2019 data. Bubbles are detected and dated from the regime-specific interplay among asset prices, fundamental values, and monetary policy shocks. We rationalize the empirical evidence with an Overlapping Generations model, able to generate a bubbly scenario with shifts in monetary policy, and where agents form beliefs over transition dynamics. By matching the VAR impulse responses, we find that procyclicality and financial instability align with high equity premia and the presence of asset price bubbles. Monetary policy tightening, by increasing real rates, is ineffective in deflating bubble episodes. [ABSTRACT FROM AUTHOR]

This paper posits that when an asset exhibits a bubble, its price process can be unbounded from above in finite time with positive probability if a quadratic variation (QV) risk premium is large enough. Based on the local martingale theory of bubbles, we provide sufficient conditions under which price explosion occurs via the QV channel provided that bubbles are present. This QV channel of price explosions is new to the literature and distinct from the explosive autoregressive (AR) dynamics, which is often identified with the presence of bubbles as defined in the time series literature. Using the S&P 500 index and a sample of individual stocks over 1996–2021, we document the existence of price explosions during periods when bubbles occur. Almost all price explosion episodes discovered are associated with the QV and not AR drift channel. [ABSTRACT FROM AUTHOR]

As an emerging financial instrument, the risk of asset price bubbles is becoming more and more prominent and has a far-reaching impact on the global financial market. Based on the ADF model and PSY algorithm, the study constructs an asset price bubble identification model, explores the formation mechanism of asset price bubbles in the financial market, the contagion effect of asset price bubbles in the inter-market, and ultimately puts forward suggestions for targeted regulatory strategies. In the numerical simulation of the formation mechanism of asset price bubbles, both Bubble 1 and Bubble 2 experience 10 periods, and the peaks of the two bubbles appear at t=14 and t=34.5, respectively. The rate of rise of asset prices is slower than the rate of decline, and the impact on the financial market is greater when the financial asset bubble bursts. There is a two-way bidirectional contagion effect between the three markets of stock, bond, and property. Therefore, regulation of asset price bubbles should focus on improving the stock market trading system, publicizing and educating, and restricting real estate loans.