Speculative Components in Mature Stock Markets: Do They Exist and are They Related?

Advances in Quantitative Analysis of Finance and Accounting, Vol. 3, pp. 217-246, 2006

39 Pages Posted: 19 Oct 2007 Last revised: 9 Apr 2008

See all articles by Ramaprasad Bhar

Ramaprasad Bhar

UNSW Business School, Risk and Actuarial Studies

A. (Tassos) G. Malliaris

Loyola University of Chicago - Department of Economics

Abstract

Economists have long conjectured that movements in stock prices may involve speculative components. This bubble, as it is usually referred to, is 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, their existence is inherently an empirical issue that has not been settled. This paper proposes a new methodology for testing for the existence of rational bubbles. Unlike previous authors, we treat both the dividend and the bubble process as part of the state vector. The new methodology is applied to the four mature markets of the U.S., Japan, England and Germany to test whether a bubble was present during the period of January 1951 to December 1998. This paper also examines whether there are linkages between these national bubbles. We find evidence that U.S. bubbles cause bubbles in the other three markets but we find no evidence for reverse causality.

Keywords: Speculative, components, mature, stock, markets

Suggested Citation

Bhar, Ramaprasad and Malliaris, A. (Tassos) G., Speculative Components in Mature Stock Markets: Do They Exist and are They Related?. Advances in Quantitative Analysis of Finance and Accounting, Vol. 3, pp. 217-246, 2006. Available at SSRN: https://ssrn.com/abstract=1021807

Ramaprasad Bhar

UNSW Business School, Risk and Actuarial Studies ( email )

Sydney, NSW 2052
Australia

A. (Tassos) G. Malliaris (Contact Author)

Loyola University of Chicago - Department of Economics ( email )

16 E. Pearson Ave
Quinlan School of Business
Chicago, IL 60611
United States
312-915-6063 (Phone)

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