Intrinsic Bubbles: the Case of Stock Prices

45 Pages Posted: 8 Jun 2004 Last revised: 14 Dec 2022

See all articles by Kenneth Froot

Kenneth Froot

Harvard University Graduate School of Business; National Bureau of Economic Research (NBER)

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: September 1989

Abstract

Several puzzling aspects of the behavior of United States stock prices can be explained by the presence of a specific type of rational bubble that depends exclusively on dividends. We call such bubbles "intrinsic" bubbles because they derive all of their variability from exogenous economic fundamentals, and none from extraneous factors. Unlike the most popular examples of rational bubbles, intrinsic bubbles provide an empirically plausible account of deviations from present-value pricing. Their explanatory potential comes partly from their ability to generate persistent deviations that appear relatively stable over long periods.

Suggested Citation

Froot, Kenneth and Obstfeld, Maurice, Intrinsic Bubbles: the Case of Stock Prices (September 1989). NBER Working Paper No. w3091, Available at SSRN: https://ssrn.com/abstract=304858

Kenneth Froot (Contact Author)

Harvard University Graduate School of Business ( email )

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Maurice Obstfeld

University of California, Berkeley ( email )

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Peterson Institute for International Economics ( email )

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National Bureau of Economic Research ( email )

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Centre for Economic Policy Research ( email )

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