In the 1980s, bubbles occurred in the economy of Japan when banks were deregulated partially. In the late 1990s, the dot-com boom happened that affected the stock market in which people purchased stocks at high prices. They purchase the stocks with the view of selling it at a high price in future which leads to a huge market crash. The resources are transferred in the areas of rapid development when bubbles occur in markets, equities and economies.
The difference between US dollars and Japanese Yen is huge which affects the stock market of Japan. The flow of dollars in Japanese banks decreases and the crisis leads to the closure of many securities in Japan. The customers withdraw their money from banks. The banks are not able to pay out money, and they take a loan from central banks. Crashes and bubbles play a significant role in the efficient market hypothesis (Palan, 2010). The efficient market hypothesis states that it is not possible to beat the market as the efficiency of the stock market causes the existing prices of stock to reflect and incorporate all relevant information. The stocks trade in the market at their fair value which makes impossible for the investors to sell stock at inflated prices or purchase undervalued stocks. The government of the countries implements rules and regulations to regulate the stock market.
Market crashes and bubbles play a crucial role in the efficient market hypothesis. Bubbles in the stock market start with an increase in the price of stock. The investors purchase the stock at a high price with the view of high returns in the future. The investors expect to sell the stock at higher prices and when there is a continuous increase in the stock prices; consequently, it leads to losses that affect the investors. The mispricing effects of herding are a major reason for market bubbles and crashes. Narrow framing and representatives’ bias contribute to market bubbles and crashes because the trading behaviour affects the stock market when naïve market participants are involved.