Fama on Bubbles
Journal of Economic Surveys (Forthcoming)
11 Pages Posted: 2 Sep 2014 Last revised: 23 Jan 2015
Date Written: January 22, 2015
While Eugene Fama has repeatedly expressed his discontent with the notion of an 'irrational bubble', he has never publicly expressed his opinion on 'rational bubbles'. On empirical grounds Fama rejects bubbles by referring to the lack of reliable evidence that price declines are predictable (Fama, 2014). However, this argument cannot be used to rule out rational bubbles because such bubbles do not necessarily imply return predictability, and return predictability of the kind documented by Fama does not rule out rational bubbles. On data samples that include the 1990s, there is evidence of an explosive component in stock market valuation ratios, consistent with a rational bubble.
Keywords: Eugene Fama, irrational and rational bubbles, return predictability, explosive stock prices
JEL Classification: G12
Suggested Citation: Suggested Citation