Texas Tech University

A study of 175 years of stock market activity reveals innovation and speculation drives bubble activity

Ashley Kilgore

August 1, 2018

INFORMS - A group of data scientists conducted an in-depth analysis of major innovations and stock market bubbles from 1825 through 2000 and came away with novel takeaways of their own as they found some very distinctive patterns in the occurrence of bubbles over 175 years.

The study to be published in the August edition of the INFORMS journal Marketing Science is titled "Two Centuries of Innovations and Stock Market Bubbles," and is authored by Alina and Sorin Sorescu of Mays Business School at Texas A&M University; Will Armstrong of the Rawls College of Business at Texas Tech University; and Bart Devoldere from the Vlerick Business School in The Hague, The Netherlands.

The authors detected bubbles in approximately 73 percent of the innovations they studied, revealing the close relationship between innovation and stock market bubbles. Further, they found that the magnitude of the bubbles is tied to the awareness levels or visibility of each innovation. In other words, the more broadly known the innovation, the more likely the presence of a stock market bubble in the industry where the innovation is introduced.

But awareness and innovation aren't the only drivers for the stock market bubbles. The higher degree of "radicalness" for innovations is more likely to bolster the clout of the specific innovation in the marketplace, otherwise known as an "indirect network effect."

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