Visiting scholar José Scheinkman, currently the Edwin W. Rickert Professor of Economics at Columbia University and the Theodore A. Wells '29 Professor of Economics Emeritus at Princeton University, presented a Friedman Forum lecture to undergraduates.
Scheinkman used historical episodes - the South Sea bubble, the extraordinary rise of stock prices during the roaring twenties, the Internet bubble, and the recent credit bubble - to illustrate three stylized facts concerning asset price bubbles:
First, that asset price bubbles coincide with increases in trading volume.
Second, that asset price bubble deﬂation seems to correspond with increases in an asset’s supply.
Third, that asset price bubbles often occur in times of ﬁnancial or technological innovation.
Scheinkman then argued that a model of bubbles based on (i) the presence of ﬂuctuating heterogeneous beliefs among investors and (ii) an asymmetry between the cost of acquiring an asset and the cost of shorting that same asset can be used to explain these observations.