Fama on Bubbles

7 Pages Posted: 3 Mar 2016

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

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. 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, explosive stock prices, irrational and rational bubbles, return predictability

Suggested Citation

Engsted, Tom, Fama on Bubbles (April 2016). Journal of Economic Surveys, Vol. 30, Issue 2, pp. 370-376, 2016. Available at SSRN: https://ssrn.com/abstract=2741379 or http://dx.doi.org/10.1111/joes.12104

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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