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IMF: When Bubbles Burst

Via Daily Speculations, here’s a study conducted by the International Monetary Fund (IMF) - When Bubbles Burst - that talks about the macroeconomic and financial aftereffects of the bursting of an asset price bubble:

  • To qualify as a bust, a housing price contraction had to exceed 14%, compared with 37% for equities.
  • There were significant price spillovers across asset classes. In an equity price bust, housing prices tended to decline in tandem with equity prices, while in a housing price bust equity prices fell more quickly and by a larger amount than housing prices.

IMF Study - When Bubbles Burst

While the study may focus on US markets, post-bubble scenarios in the Indian real estate & stock markets should follow similar patterns.

This entry was posted on Tuesday, March 27th, 2007 at 8:41 am and is filed under investing. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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    One Response to “IMF: When Bubbles Burst”

    1. Nikhil Says:
      March 27th, 2007 at 10:37 am

      Day by day it becoming clearer that US subprime mortage woes, foreclosures, falling house prices are getting spilled into other areas of US economy/indorectly to the world. Additionally, In India inflation is the no. 1 political hot potato. Hence if both these risks take a nasty turn in the coming months, I expect Indian equity market to tank like a toilet flush, with liquidity draining overnight. In such circumstance it would be prudent for the Indian investors to reduce their equity exposure to about 20% of their portfolio. Mind you, even during the great depression in the US, 20/80 (equity/debt) portfolio survived the meltdown. So be the early bird. Any takers?