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
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
On the Inception of Rational Bubbles in Stock Prices
By Behzad Diba and Herschel I. Grossman
-
Rational Bubbles in Stock Prices?
By Behzad Diba and Herschel I. Grossman
-
Intrinsic Bubbles: the Case of Stock Prices
By Kenneth Froot and Maurice Obstfeld
-
Bubbles, Fads, and Stock Price Volatility Tests: a Partial Evaluation
-
Was There a Bubble in the 1929 Stock Market?
By Peter Rappoport and Eugene N. White
-
Asset Price Bubbles in Incomplete Markets
By Robert A. Jarrow, Philip Protter, ...
-
Asset Price Bubbles in Incomplete Markets
By Robert A. Jarrow, Philip Protter, ...
-
Asset Price Volatility, Bubbles, and Process Switching
By Robert P. Flood and Robert J. Hodrick