Are There Rational Bubbles in the US Stock Market? Overview and a New Test
University of New South Wales (UNSW) - School of Banking and Finance
A. G. (Tassos) Malliaris
Loyola University of Chicago - Department of Economics
ASSET PRICE BUBBLES: IMPLICATIONS FOR MONETARY AND REGULATORY POLICY, ELSEVIER SCIENCE, George Kaufman, ed., pp. 125-144, Elsevier Science, 2001
A speculative bubble is usually defined as the difference between the market value of a security and its fundamental value. Although there are several important theoretical issues surrounding the topic of asset bubbles, the existence of bubbles is inherently an empirical issue that has not been settled yet. This paper reviews several important tests and offers one more methodology that improves upon the existing ones. The new test is applied to the annual US stock market data spanning over a century and at the monthly frequency covering the post-war period. Although we find evidence of stock price bubble in both cases, the post-war period exhibit only positive component whereas the annual data exhibit some episode of negative bubble.
Number of Pages in PDF File: 27
Keywords: Stock Market, Asset Bubbles, Testing for Market Overvaluation, Fundamental Valuation
JEL Classification: C1, C4, G1, E2Accepted Paper Series
Date posted: January 17, 2008
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