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A Bayesian's Bubble

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  • C. WEI LI
  • HUI XUE

Abstract

The acceleration of the U.S. productivity growth in the late 1990s suggests a significant advance in technological innovation, making the perceived probability of entering a “new economy” ever increasing. Based on macroeconomic data, we identify a Bayesian investor's belief evolution when facing a possible structural break in the economy. We show that such belief evolution plays a significant role in explaining both the stock market boom and crash during 1998 to 2001. We conclude that a rational investor's uncertainty about the future of the U.S. economy provides an alternative explanation for the late 1990s stock market “bubble.”

Suggested Citation

  • C. Wei Li & Hui Xue, 2009. "A Bayesian's Bubble," Journal of Finance, American Finance Association, vol. 64(6), pages 2665-2701, December.
    • Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2665-2701
    DOI: 10.1111/j.1540-6261.2009.01514.x
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    Cited by:

    1. Huang, MeiChi, 2014. "Bubble-like housing boom–bust cycles: Evidence from the predictive power of households’ expectations," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 2-16.
    2. Chen, Shyh-Wei & Hsu, Chi-Sheng & Xie, Zixong, 2016. "Are there periodically collapsing bubbles in the stock markets? New international evidence," Economic Modelling, Elsevier, vol. 52(PB), pages 442-451.
    3. Chan, Joshua C.C. & Santi, Caterina, 2021. "Speculative bubbles in present-value models: A Bayesian Markov-switching state space approach," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    4. Phillips, Peter C.B., 2016. "Modeling speculative bubbles with diverse investor expectations," Research in Economics, Elsevier, vol. 70(3), pages 375-387.
    5. Ayesha Liaqat & Mian Sajid Nazir & Iftikhar Ahmad, 2019. "Identification of multiple stock bubbles in an emerging market: application of GSADF approach," Economic Change and Restructuring, Springer, vol. 52(3), pages 301-326, August.
    6. Ayesha Liaqat & Mian Sajid Nazir & Iftikhar Ahmad & Hammad Hassan Mirza & Farooq Anwar, 2020. "Do stock price bubbles correlate between China and Pakistan? An inquiry of pre‐ and post‐Chinese investment in Pakistani capital market under China‐Pakistan Economic Corridor regime," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 323-335, July.
    7. Neil D Pearson & Zhishu Yang & Qi Zhang & Stijn Van Nieuwerburgh, 0. "The Chinese Warrants Bubble: Evidence from Brokerage Account Records," Review of Economic Studies, Oxford University Press, vol. 34(1), pages 264-312.
    8. Stéphane Goutte & David Guerreiro & Bilel Sanhaji & Sophie Saglio & Julien Chevallier, 2019. "International Financial Markets," Post-Print halshs-02183053, HAL.

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