Speculative Bubbles in Stock Prices? Tests Based on the Price-Dividend Ratio

21 Pages Posted: 16 Jan 2004

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Carsten Tanggaard

affiliation not provided to SSRN

Date Written: January 2004

Abstract

Building on the framework from Cochrane (1992), we construct a bootstrap test for rational stock price bubbles that does not require a detailed specification of an underlying equilibrium model. The test makes use of the fact that if there are no bubbles, the variance of the price-dividend ratio can be decomposed into covariances between the price-dividend ratio, and future dividend growth and stock returns, respectively. We use standard bootstrap techniques to compute finite-sample p-values for the null hypothesis that this variance/covariance restriction holds. The test is applied on US stock market data over the period 1871-2002. We also test for unit roots in the price-dividend ratio, and in contrast to standard practice we explicitly consider the explosive alternative in addition to the usual stationary alternative. We find that up to the late 1980s, there are no strong indications of bubbles in US stock prices. However, by including data from the 1990s, there is some evidence of the presence of speculative bubbles.

Keywords: Speculative bubbles, price-dividend ratio, variance decomposition, bootstrap simulation, US stock market

JEL Classification: C32, G12

Suggested Citation

Engsted, Tom and Tanggaard, Carsten, Speculative Bubbles in Stock Prices? Tests Based on the Price-Dividend Ratio (January 2004). EFA 2004 Maastricht Meetings Paper No. 1804. Available at SSRN: https://ssrn.com/abstract=486006 or http://dx.doi.org/10.2139/ssrn.486006

Tom Engsted

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Carsten Tanggaard (Contact Author)

affiliation not provided to SSRN

Register to save articles to
your library

Register

Paper statistics

Downloads
502
Abstract Views
1,781
rank
54,318
PlumX Metrics