Stock Market Bubbles and Anti-Bubbles
42 Pages Posted: 27 Oct 2016 Last revised: 31 Jul 2018
Date Written: July 11, 2018
Using a simple model of equity valuation, we define 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 profitability. Topically, we find 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
Suggested Citation: Suggested Citation