ashes (rapidly plunging asset prices to levels well below supportable values for the underlying assets), and eventual recoveries (where asset prices roughly equate to supportable values for the underlying assets). There have also been many explanations for these anomalies that result in long-term excess volatility. Neither the plethora of explanations nor the experiences with long-term volatility, however, have ended the occurrence of long-term volatility (Abreu & Brunnermeier, 2003).
Long-term volatility is described by bubble-crash-recovery asset pricing cycles. Six well known examples of the long-term volatility cycle are as follows:
5. Equity Asset Bubble in Japan [1991]
6. Internet IPO Bubble, or Dot-Com Bubble [2000]
There have been many other long-term volatility-related stock market crashes. Research found that the recovery periods varied over the years from the Crash of 1903 through the Crash of 2000, but that subsequent to the Crash of 1946, recovery periods averaged approximately 24 months from the Crash of 1962 through the Crash of 1987. The Crash of 1990 was short-lived at only 11 months. The Internet IPO Crash, however, has yet to return to pre-crash levels. The Internet Crash began in August 2000. Thus, in May 2005, the recovery period has stretched to 57 months without regaining pre-crash levels.
The Internet equity stock bubble began in the late-1990s and extended through the crash in 2000. The late-1990s in the United States was another prosperous era in which too much money was available for the quality of investments available. Venture capital firms share a great deal of the blame for the Internet IPO Bubble, because those firms provided initial financing for the dot-com companies and actively promoted the idea of a new paradigm in which sound economic principles no longer mattered. The idea was to keep the revenue flowing, forget profitability, forget dividends, and keep equity prices risi...