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

See all articles by Yangru Wu

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Abstract

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

Wu, Yangru, Rational Bubbles in the Stock Market: Accounting for the U.S. Stock-Price Volatility. Economic Inquiry, Volume XXXV, Number 2, April 1997, Available at SSRN: https://ssrn.com/abstract=86561

Yangru Wu (Contact Author)

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

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