Stock Market Bubbles and Anti-Bubbles

Abstract

Using a simple model of equity valuation, we define stock market bubbles and anti-bubbles as periods in which the dynamics of valuation is temporarily explosive. We identify a mechanism for the creation and destruction of bubbles and anti-bubbles that depends on the interaction between valuation and expected change in corporate profitability. Topically, we find that valuation dynamics are explosive in 2017, suggesting the possible formation of an equity bubble in the US.

Keywords: Asset Pricing, Bubbles, Anti-Bubbles, Multiple Bubbles, Price Explosiveness, Explosive Autoregression

JEL Classification: G10, G12, C22