In a Nutshell,explain What the Trade or Elasticity Approach Says

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The Answer is Speculative bubbles in the foreign exchange market are formed when the movement of exchange rate in a given direction (could be either an appreciation or a depreciation)generates an expectation that it will continue to move in the same direction even though such expectations are not supported by the fundamentals.This may lead to a feeding frenzy just as it is seen in the stock market and leads to an artificially inflated value for that particular currency.When the bubble bursts and it eventually does,the exchange rate movement reverses itself and the same overzealousness that created the bubble in the first place works in the opposite direction and generates too much pessimism regarding the value of that same foreign currency.The result is a currency whose price widely fluctuates around its long-run equilibrium value.

In a Nutshell,explain What the Trade or Elasticity Approach Says

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