Measuring Asset Price Bubbles in Real Time: The Case of Gold

Kamakura Releases Another Research Paper by Jarrow, Kchia, and Protter. Honolulu-based Kamakura Corporation announced today the release of another pioneering research paper that uses a new methodology for measuring asset price bubbles in real time. The paper “A Gold Bubble?” is authored by Kamakura Managing Director Robert A. Jarrow, Professor Younes Kchia of Ecole Polytechnique,

Editorial Team
September 28, 2011
2 minutes

Kamakura Releases Another Research Paper by Jarrow, Kchia, and Protter.

Honolulu-based Kamakura Corporation announced today the release of another pioneering research paper that uses a new methodology for measuring asset price bubbles in real time. The paper “A Gold Bubble?” is authored by Kamakura Managing Director Robert A. Jarrow, Professor Younes Kchia of Ecole Polytechnique, and Professor Philip Protter of Columbia University and focuses on the question, “Is the huge run-up in gold prices in recent months a price bubble or not?” In the paper, the authors follow on an early paper released by Kamakura on June 1 that presents a precise mathematical definition of a price bubble and uses the case of the recent LinkedIn initial public offering to prove that stock price movements in LinkedIn did indeed constitute a stock price bubble. The authors demonstrate how to use this “bubble detection” methodology in real time in the case of gold this time.

The Jarrow-Kchia-Protter (“JKP”) papers note that controlling price bubbles is essential from a regulatory point of view. William Dudley, the President of the New York Federal Reserve, in an April 9, 2010 interview with Planet Money stated “…what I am proposing is that we try to identify bubbles in real time, try to develop tools to address those bubbles, try to use those tools when appropriate to limit the size of those bubbles and, therefore, try to limit the damage when those bubbles burst.”

“From technology stocks ten years ago to home prices in the run-up to the credit crisis of 2007-2009, over-inflated asset prices that later crash have been a fundamental trigger for extended periods of economic decline,” said Kamakura Chief Administrative Officer Martin Zorn. “The lost decades in the wake of the bursting of the Japanese bubble late in 1989 are another example. JKP show how modern financial technology can be used to give a ‘yes or no’ answer to the question, “Is the price increase in this particular asset a bubble?’ We applaud the authors for both their academic insights and their practical application of this bubble detection technology.”