Asset price bubble and relationships with macroeconomic factors

One of the most controversial issues today is the unexpected sudden rises and falls in asset prices in both developing and developed countries. Especially after the 2008-2010 global crises, bubbles in asset prices and their effects reoccurred as a common financial problem. Although there are many definitions for the bubbles in asset prices, they are generally defined as deviations from the fundamental value. While many researchers claim that fluctuations in asset prices result from macroeconomic factors, some suggest they stem from speculative movements.In the present study, these excessive fluctuations in stock exchange markets have been analyzed and it has been discussed whether these movements can be taken as bubbles. The role of the central bank, which is responsible for maintaining price stability, in the bubbles observed in asset markets. Stock exchange markets are one of the channels of monetary policy to affect economy. Therefore, the reasons for excessive fluctuations in stock markets and their effects on economy have been analyzed comprehensively and an empirical study has been carried out for Turkey.In the empirical study, statistical evidence has been found concerning the presence of bubbles in stock markets during the period focused in Turkey. Moreover, a significant relation has been not found between bubble series and real sector. It has been observed that bubble series are not affected by macroeconomic factors while macroeconomic factors are affected by bubble formations. Overnight interest rates, credit volume and portfolio investment have been observed to be affected by bubble series.Bubbles occurring in asset markets should be observed carefully as they affect consumption through wealth effect; investment through their effects on borrowing cost; and price stability in the long term.Keywords: Asset prices, Bubbles, Optimal Monetary Policy