The Bubble Effect
The EMH concept is comforting in a sense. It explains how markets are supposed to work and adds an element of consistency and predictability to the markets, even though markets do not act in accordance with those ideas.
Markets are more likely to go through price bubbles, and over time, numerous bubbles have appeared and even more readily disappeared. Bubbles are followed by sudden and violent adjustments, such as Black Monday in 1987 and the demise of the dot.com sector following its bubble. During bubbles, “the market” as a whole may experience times of irrational exuberance, a term first used by Chairman of the Federal Reserve Alan Greenspan.10
Key Point
A “bubble effect” demonstrates that long-term trends are subject to ...
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