Causes and Countermeasures against Bubbles on Emerging Stock Markets

Abstract

The paper aims at performance analysis of monetary and institutional countermeasures to bubbles on emerging stock markets. The analytical framework is set by the case-matched Heckman’s model. The model derives determinants of both origins and size (in terms of lifetime) of stock market bubbles. The model allows to analyze how regulators may impact on the probability of appearance and size of stock market bubbles. Its empirical verification involves data from 32 emerging financial markets. We found that institutional excellence negatively impacts on the occurrence probability of stock market bubbles, while a tight monetary policy may burst bubbles. However, emerging stock markets are also highly influenced by the US stock market indicators (S&P 500 and VIX). National monetary and institutional instruments, therefore, have restricted influence on stock bubbles on emerging markets. An additional point is that a tight monetary policy may hinder general economic growth. Institutional instruments do not have this drawback. However, its positive influence is postponed in time. We suggest that regulators of stock markets in emerging countries should vary tools of their monetary policies to reduce costs of bubble bursts. Their policy may impose regulatory tightening (e.g. capital requirements) on banks and other financial intermediaries who participate in stock market bubble blowing.