Technology can be an incentive to
the formation of the bubbles. Many of the bubbles were accompanied with the
development of the technology revolution. The South Sea Bubble was accompanied
with the invention of insurance. And here is the railway mania and the 1929
crash which was accompanied with the invention of cars, radios and airlines.
Even the recent crisis and housing bubble was a result of the invention of the
new financial technologies.
But what makes the
development of new technology to be an incentive of the formation of
Bubbles? Pástor and Veronesi (2009) thought firms with
mainly idiosyncratic risk will initially have high market values, but as the
probability of adoption increases, the systematic risk will rise and after the
new technology was more widely adapted, it would push up the discount rates and
depresses stock prices. But Campbell and Turner (2012) tested whether or not
the adoption of railway technology affected the discount rate by comparing the
risk and volatility of railway shares with other equity securities. And their
results suggested that the direction and timing of changes in these variables
are inconsistent with a discount-rate explanation for the Railway Mania.
Brennan (2004) also investigated
the discount rate in another angle. His research is mainly about the change of
the risk premium in the 1990s in US. He found that there is evidence showing
the risk premium in capital markets that might have been assessed by sophisticated
investors were declining through the 1990’s. And he quoted that Both
Claus-Thomas and Ilmanen estimates show a decline in the equity premium in the
second half of the 1990’s. And he suggested that it contributed to the movement
of the stock price during that time.
There
is a clue to relate the monetary theory with the development of technology
during that time. Many policy makers were very optimism about the influence of
the development of the technology to the economy. They trust that the growing
productivity accompanied with the development of the technology can offset the
negative effect of the over eased credit. And thus the prosperity can be
prolonged. In fact, Greenspan often quote the work of Paul David that it should
take several years for the economy to absorb the benefit produced by the
development of the technology. May be he thought that during that time, new
technology can manifest itself with the effect of pumping the economy. And what
he should do is to ease the credit to fulfill the prosperity.
Reference:
Pastor, Lubos, and Pietro Veronesi. Learning in
financial markets. No. w14646. National Bureau of Economic Research, 2009.
Campbell, G. and Turner, J. D. (2012) “Technological
Revolutions, Cash Flows, and Asset Price Reversals: The British Railway Mania”,
Queen’s University mimeo.
Brennan,
Michael J. "How did it happen?" Economic Notes 33.1 (2004): 3-22.
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