There has been more talk about bubbes in the last six months than over the last few years. The paper, "Optimism Everywhere: Beliefs during stock price bubble", focuses on the boom and bust cycle by looking at expectations from analysts. When there is a price surge, analysts forecast exceptional earnings growth and high near-term returns. Short interest will be low, and the overall level of optimism is a strong indicator of future crashes. There are few skeptics during a bubble period.
This research adds to our bubble story, yet there is a problem of whether optimism leads to price increases or whether price increases create optimism. The line of causality would be beneficial, although it is likely that price increases and optimism are closely linked. Yet it would be helpful to understand why some price increases become bubbles. What is the driver of optimism, and how is optimism spread into price behavior?
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