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Beyond Mechanical Markets by Michael D. Goldberg, Roman Frydman

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7

Keynes and Fundamentals

THE RUN-UPS IN housing, equity, and other asset markets and the subsequent sharp reversals that were among the proximate causes of the financial crisis that began in 2007 solidified the belief that asset-price swings are largely unrelated to fundamental considerations. Instead, price bubbles supposedly form and collapse as a result of the trading decisions of market participants who are irrational, prone to emotions and other psychological factors, or engage in momentum trading.

Many observers point to the long upswing in U.S. equity prices during the 1990s as a prime example of such behavior and widely refer to this upswing as the “ dot.com or internet bubble.” During this period, there was indeed much confidence, ...

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