An Evaluation of Recent Evidence on Stock Market Bubbles

48 Pages Posted: 10 Feb 2001 Last revised: 21 Nov 2022

See all articles by Robert P. Flood

Robert P. Flood

International Monetary Fund (IMF) - Research Department; CENTRUM Business School; National Bureau of Economic Research (NBER)

Robert J. Hodrick

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Paul D. Kaplan

Morningstar Canada

Date Written: July 1986

Abstract

Several recent studies have attributed a large part of asset price volatility to self-fulfilling expectations. Such an explanation is unattractive to many since it allows allocations that need bear no particular relation to those implied by the economist's standard kit ofmarket fundamentals. We examine the evidence presented in some of thesestudies and find (i) that all of the bubble evidence can equally well beinterpreted as evidence of model misspecification and (ii) that a slight extension of standard econometric methods points very strongly toward model misspecification as the actual reason for the failure of simple models of market fundamentals to explain asset price volatility.

Suggested Citation

Flood, Robert P. and Hodrick, Robert J. and Kaplan, Paul D., An Evaluation of Recent Evidence on Stock Market Bubbles (July 1986). NBER Working Paper No. w1971, Available at SSRN: https://ssrn.com/abstract=256070

Robert P. Flood (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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CENTRUM Business School

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National Bureau of Economic Research (NBER)

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Robert J. Hodrick

Columbia University - Columbia Business School, Finance ( email )

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National Bureau of Economic Research (NBER)

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Paul D. Kaplan

Morningstar Canada ( email )

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Canada

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