Indian Stock market has touched new heights in the recent past. The market has also seen tremendous volatility when sensex went past 12,000 mark and came below the 8,000 mark. This volatility is due to various reasons ranging from panic to rising oil prices, global interest rates, etc.
The
market capitalization on Bombay Stock Exchange (BSE) had reached nearly Rs. 34,50,000
cr on May 11, 2006 as BSE Sensex peaked to 12,671. This was accompanied by concurrent
booms in the commodity markets as well as real estate markets. Hence, the fall
in BSE Sensex of 826 points on May 18, 2006 and 452 points on May 19, 2006 came
as a rude jolt to many investors, spreading nervousness and panic across the markets.
According to conventional wisdom, market crashes are triggered by slowing economies.
What is intriguing about the latest crash in Indian stock markets is that the
markets seem to be completely out of sync with the Indian economic growth story.
This crash may have been driven more by sudden spread of panic rather than by
economic downturn. The end result is a market mayhem followed by bearish phase,
which may last long.
History
is replete with examples of different types of market crashes. One such crash,
the Dutch tulip crash, came swiftly after the rapid rise in tulip bulb prices
to astronomical levels, writes Terry Burnham (2005). People wanting to pay the
price of a house in Amsterdam for a tulip bulb are a good example of market irrationality.
Many a research in behavioral finance has provided scientific evidence of market
irrationality, he adds.
Burnham
cites another exampleThe crash of stock markets in the US on October 19, 1987when
the Dow Jones Industrial Average fell by 23%. The Federal Reserve had to intervene
to guarantee certain trades and prevent a catastrophe. Even Professor Robert Shiller,
the renowned author of the book, Irrational Exuberance, has not been able
to establish the irrefutable reasons for this crash, notes Burnham (2005). Never
mind that because earthy wisdom teaches us that it is a worrisome situation when
prices of equity shares rise at a rate higher than the rate of growth in profits
of companies.
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