Financial bubbles and the COVID-19 pandemic

Abstract

Has the COVID-19 pandemic created a bubble? After an intial period of recession markets started recovering and have been on the high ever since. In particular, specific firms and sectors have seen their stocks sharply rise in 2020. Tesla's stock increased by 740% while Bitcoin's valuation rose by more than 220% since the beginning of the year. Moreover, since the beginning of 2021 the major stock market indexes, boosted by the liquidity injections, have been rising and in some cases even reached record high levels. An analysis will therefore be provided on whether the pandemic has in fact created a bubble by firstly analysing economic bubbles from a theoretical point of view, focusing in particular on the behavioural finance perspective. Subsequently an overview of the most important bubbles throughout history will be provided. The current market situation created by the COVID-19 pandemic will be analysed and compared with the ones that existed during the Great Bull Market of 1929 and the Global Financial Crisis of 2007-2008, and finally an educated guess will be made on what can happen once the financial stimuli will end.