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To answer why the deviation between the market price and the fundamental value of a good does not converge but persists, expands, attracts more and more demands until shrinks suddenly, this study explores bubbles from an analytical perspective based on an integrated market system model. The value-increment demand and supply of a re-sellable good are defined and distinguished from the classical fundamental demand and supply. In particular, the value-increment demand (supply) curve in a re-sellable good market is corresponding to the supply (demand) curve of the fund market and capital flow interacts with the growth rate of price instead of the price itself. A model integrating multiple re-sellable good markets and fund market shows that in addition to the classical mechanism that allocates capital resources efficiently within the market system, there is another mechanism in the system, which allocates capital resources according to the value-increment demand, supply and the growth rate of price. This value-increment mechanism might lack a balance function or efficient capital allocation function among re-sellable good markets although the value-increment mechanism may help the fund market achieve the maximum return in a short run. The value-increment mechanism is closely related to the expanding and shrinking of the deviations between the market price and the fundamental value. According to the behavior of total supply, total demand, price, and patterns of capital flows, a re-sellable good market is divided into normal and abnormal market. The abnormal market is further categorized into the ascending, peak and descending phase. The characteristics in the ascending and the descending phase mimic the characteristics in the boom and burst of bubbles respectively. The short-lived peak phase between the ascending and descending phase is similar to the transitory process from boom to burst of bubbles. The three key factors causing the transition from the boom to the burst of bubbles are the growth rate of price, the elasticity of money supply and demand and capital flows, which might serve as potential measures to test and control bubbles. |
