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Speculative Nonfundamental Components in Mature Stock Markets: Do they Exist and are they Related?

In: Advances In Quantitative Analysis Of Finance And Accounting Essays in Microstructure in Honor of David K Whitcomb

Author

Listed:
  • Ramaprasad Bhar

    (School of Banking and Finance, The University of New South Wales, Australia)

  • A. G. Malliaris

    (Department of Economics and Finance, Loyola University of Chicago, USA)

Abstract

Economists have long conjectured that movements in stock prices may involve speculative components, called bubbles. A bubble is defined as the difference between the market value of a security and its fundamental value. The topic of asset bubbles remains controversial because the existence of a bubble is inherently an empirical issue and no satisfactory test has yet been devised to estimate the magnitude of a bubble. This paper proposes a new methodology for testing for the existence of rational bubbles. Unlike previous authors, we treat both the dividend that drives the fundamental part and the nonfundamental process as part of the state vector. This new methodology is applied to the four mature markets of the US, Japan, England, and Germany to test whether a speculative component was present during the period of January 1951 to December 1998 in these markets. The paper also examines whether there are linkages between these national speculative components. We find evidence that the nonfundamental component in the US market causes the other three markets but we find no evidence for reverse causality.

Suggested Citation

  • Ramaprasad Bhar & A. G. Malliaris, 2006. "Speculative Nonfundamental Components in Mature Stock Markets: Do they Exist and are they Related?," World Scientific Book Chapters, in: Ivan E Brick & Tavy Ronen & Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting Essays in Microstructure in Honor of David K Whitcomb, chapter 11, pages 217-246, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812707291_0011
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    Cited by:

    1. Nistor, Costel & Dumitriu, Ramona & Stefanescu, Razvan, 2012. "Impact of the global crisis on the linkages between CAC 40 and indexes from CEE countries," MPRA Paper 42511, University Library of Munich, Germany, revised 18 Sep 2012.

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