Rational Bubbles in the Stock Market: Accounting for the U.S. Stock-Price Volatility
Economic Inquiry, Volume XXXV, Number 2, April 1997
Posted: 13 May 1998
Can rational stochastic asset bubbles help explain the excess volatility of stock prices? The bubble considered here is treated as an unobserved state vector in the state-space model and is easily estimated using the Kalman filter. I find that the bubble components estimated account for a substantial portion of U.S. stock prices, and the model does a credible job in fitting the data, especially during several bull and bear markets in this century. Much of the deviation of stock prices from the present-value model are captured by the bubble.
NOTE: This paper was written while the author was affiliated with West Virginia University.
JEL Classification: G12, E44, E52
Suggested Citation: Suggested Citation