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Price Bubbles in Tehran Stock Market: A Dynamic Stochastic General Equilibrium Model

Author

Listed:
  • Asadi, Ehsan

    (Ph.D. Candidate of Economics, Azad Islamic University, Shiraz Branch)

  • Zare, Hashem

    (Assistant Professor of Economics, Azad Islamic University, Shiraz Branch)

  • Ebrahimi, Mehrzad

    (Assistant Professor of Economics, Azad Islamic University, Shiraz Branch)

  • Piraiee, Khosrow

    (Associate Professor of Economics, Azad Islamic University, Shiraz Branch)

Abstract

Although stock market bubbles play an important role in determining stock price and economic fluctuations, their explanation based on fundamental principles of the economy is a challenging task. The purpose of this paper is to identify the factors shaping the price bubbles of the Tehran Stock Exchange according to a Bayesian DSGE model in the real business cycles framework. Stock price bubbles in this model appear endogenously as a positive feedback mechanism that is supported by optimistic beliefs. Based on the obtained results, the sentiment shock was introduced as the most important source of bubbles fluctuations followed by fluctuations in the stock price. This shock reflects households’ beliefs about the relative size of bubbles and is passed to the real economy through credit constraints. This shock also expresses a large part of the fluctuations in output, consumption, and investment. Also, the labor supply shock and the investment-specific technology shock had a dominant role in creating employment and investment fluctuations, respectively

Suggested Citation

  • Asadi, Ehsan & Zare, Hashem & Ebrahimi, Mehrzad & Piraiee, Khosrow, 2019. "Price Bubbles in Tehran Stock Market: A Dynamic Stochastic General Equilibrium Model," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 6(2), pages 73-100, August.
    • Handle: RePEc:ris:qjatoe:0149
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    More about this item

    Keywords

    Price bubbles; DSGE model; Sentiment shock; Real business cycles;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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