Dotcom Mania: The Rise and Fall of Internet Stock Prices

56 Pages Posted: 3 Nov 2008

See all articles by Eli Ofek

Eli Ofek

New York University (NYU) - Department of Finance

Multiple version iconThere are 4 versions of this paper

Date Written: November 2001


This paper provides one potential explanation for the rise, persistence and eventual fall of internet stock prices. Specifically, we appeal to a model of heterogenous agentswith varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that â¬Soptimisticâ¬? investors overwhelm â¬Spessimisticâ¬? ones, leading to prices not reflecting fundamental values about cash flows summarized by aggregate beliefs. Empirical support for this explanation is provided by exploring the behavior of internet stock prices during the period January 1998 to November 2000. In particular, we document four important elements to our story: (i) the high level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to a shift towards potentially optimistic investors, (iii) empirical results consistent with shorting being at its maximum possible level for internet stocks, and (iv) the eventual fall, or bubble bursting, of internet stocks being tied to the increase in the number of sellers to the market via expiration of lockup agreements.

Suggested Citation

Ofek, Eli, Dotcom Mania: The Rise and Fall of Internet Stock Prices (November 2001). NYU Working Paper No. FIN-01-037, Available at SSRN:

Eli Ofek (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

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