Irrational exuberance in the Chinese iron ore market?

ABSTRACT

The rapid run-ups in the Chinese iron ore market in the first half of 2016 have sparked much concern about the appearance of speculative bubbles in this market among many market analysts. Using a recently developed bubble testing procedure, we confirm that there indeed existed periods of irrational exuberance in the Chinese iron ore market. However, most of the bubble periods are short-lived, reflecting the market’s ability to quickly respond to price deviations unjustified by fundamentals. The longest bubble period occurred in mid-2014, corresponding to a period of relatively low trading volume. Using a fractional probit model, we find evidence consistent with the hypothesis that market liquidity may play a role in bubble occurrences.

KEYWORDS:

• Chinese iron ore market
• irrational exuberance
• speculation
• bubbles
• liquidity

JEL CLASSIFICATION:

• D84
• G12
• G13
• G14

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ See http://www.businessinsider.com/china-is-becoming-a-nation-of-iron-ore-traders-2016-3, accessed on 30 June 2016.

² See http://www.reuters.com/article/us-ironore-supply-ahome-analysis-idUSKCN0YI18U, accessed on 30 June 2016.

Additional information

Funding

This work was supported by the West Virginia Agricultural Experiment Station and the US Department of Agriculture National Institute of Food and Agriculture, under Hatch project WVA00683.