On December 1996, Alan Greenspan, chairman of the Federal Reserve Board in Washington, used the term “irrational exuberance” to describe the behavior of stock market investors. The words irrational exuberance quickly became Greenspan’s most famous quote and a catch phrase for everyone who follows the market [1].

Financial history can be read in many respects, as a history of boom and burst bubbles. The infamous Dutch Tulip Mania (1634 - 1637), the French Mississippi Bubble (1719 - 1720), the South Sea Bubble in the United Kingdom (1720s), the first Latin American debt boom (1820s), and railway manias in the United Kingdom (1840s) and United States (1870s) are all notable examples. In the past century, no busts have been more devastating than the Great Depression ushered in by the collapse of US stock markets in 1929 [2]. In. Over the past few decades, the Japanese Heisei bubble in the late 1980s, the various emerging market booms and busts in the 1980s and 1990s, and the equity mania in the late 1990s, offer others examples of speculative frenzies gone awry.

Despite such evidence, many debates persist on the existence of speculative bubbles. The existence of speculative bubbles in financial markets has been a long-standing issue under debate. Financial economists and market participants often hold quite different views about the price of an asset [3]. The "pro-bubble" side is largely supported by some hedge fund managers and some policy-makers. While on the other side, a number of academic economists are skeptical of bubbles’ theory. Financial economists and market participants often hold quite different views about the price of an asset. On the one hand, financial economists usually believe that given the assumption of rational behavior and rational expectations, the price of an asset must simply reflect market fundamentals, that is to say, the price of an asset, can only depend on information about current and future returns from this asset. Deviations from this market fundamental value are taken as prima facie signs of irrationality. On the other hand, market participants argue that strange events and self-fulfilling rumors may well influence the price, if believed by other participants to do so; "crowd psychology" becomes an important determinant of price. Rationality of behavior often does not imply that the price of an asset be equal to its fundamental value. In other words, there can be rational deviations of the price from fundamental value - rational bubbles. The word "bubble" recalls to some famous episodes in finance history in which asset price rose far higher than it could be easily explained by fundamentals, and with investors appeared to betting that other investors would drive price even higher in the future. History has too often witnessed the rise and collapse of assets price. The first recorded bubble is the "Tulip mania", in February 1637 - a period in Dutch history where prices for tulip bulbs reached extraordinarily high levels and then suddenly collapsed. Almost surely, the financial crisis caused by the burst of the U.S. housing bubble is not last one. Many debates rose to know whether price "bubbles" ever existed. The "pro-bubble" side is largely supported by some hedge fund managers and some policy-makers. On the other side, a number of academic economists are skeptical of the bubble theory, citing a lack of empirical evidence [4].

This paper examines the nature and the existence of bubbles in financial markets. What are bubbles? Are bubbles consistent with rationality? Do they have real effects? How do they behave? These are questions we answer in the following sections. The paper is organized as follows: Section 2 focus on rationality and bubbles and discusses the existence of bubble. Section 3 presents real effects of bubbles.

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