Fama on Bubbles

Journal of Economic Surveys (Forthcoming)

11 Pages Posted: 2 Sep 2014 Last revised: 23 Jan 2015

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2015

Abstract

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

Engsted, Tom, Fama on Bubbles (January 22, 2015). Journal of Economic Surveys (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2490371 or http://dx.doi.org/10.2139/ssrn.2490371

Tom Engsted (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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