Is the Internet Bubble Consistent with Rationality?

43 Pages Posted: 16 May 2006

See all articles by Sreedhar T. Bharath

Sreedhar T. Bharath

Arizona State University (ASU) - Finance Department

Siva Viswanathan

University of Maryland - Robert H. Smith School of Business

Date Written: November 2006

Abstract

Possibly. We empirically examine the plausibility of rational models designed to explain stock price bubbles associated with technological revolutions such as the internet. Our innovation is to examine the volatility patterns of old economy (brick and mortar) firms that adopted the internet as a medium of commerce (e-Commerce). During the bubble, there is an increase in idiosyncratic risk for firms adopting the technology while post-crash, there is an increase in systematic risk for the same technology adoption by firms both in the stock and options markets. We find some quantitative evidence that the weight of the e-Commerce business to justify the median firm's volatility increase in the bubble period, is borne out five years later with the actual sales data. Overall we conclude that our evidence is consistent with rationality and that both rational and behavioral approaches must provide quantitative predictions in order to have a sharper face off and to better understand asset price bubbles.

Keywords: Bubble, Rationality, Technological revolution, Volatility

JEL Classification: G12, G14, G11

Suggested Citation

Bharath, Sreedhar T. and Viswanathan, Siva, Is the Internet Bubble Consistent with Rationality? (November 2006). Available at SSRN: https://ssrn.com/abstract=943609 or http://dx.doi.org/10.2139/ssrn.943609

Sreedhar T. Bharath (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Siva Viswanathan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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