The research, set to be published in the Journal of Financial and Qualitative Analysis, analyzed China’s 2007 stock market. During that bubble period, stock prices tripled as activity nearly quadrupled, only for both to return to normal levels after the bubble deflated.
The study found that stocks with a bigger amount of analyst coverage experienced significantly smaller bubbles than those that weren’t covered as well. For example, stocks with 20 analysts reporting on them developed bubbles more than 60 percent less severe than stocks with no coverage.
Researchers say the lessons learned from China’s example can easily be applied to the real estate market with similar effects.
“We ran into trouble with the recent housing bubble because novice buyers falsely assumed there would always be a future buyer willing to pay more,” said Timothy R. Burch, associate professor of finance at the school and one of the survey’s conductors. “This problem is much more severe when there is greater investor disagreement about an asset’s value. Our research shows that making relevant information about an asset readily available reduces disagreement, which in turn makes bubbles less severe.”
The team suggests that governments and regulatory bodies should freely disseminate information about transactions, appraisals, rental yields, vacancies, and other facts about a property to “level the playing field” for market participants. This, they said, should help limit bubbles.
“The Federal Reserve or another government body could take steps to help coordinate the beliefs of all the players in the real estate market,” said Sandro Andrade, researcher and associate professor of finance. “This could be achieved by creating a ‘Kelley Blue Book’ for real estate, a centralized, well-promoted website where everyone could go before making real estate decisions. Providing such information could go a long way in reducing the odds and severity of future real estate bubbles.”
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