Intrinsic Bubbles and Fat Tails in Stock Prices
AbstractWe study the constant discount rate present value model for stock pricing in a stochastic setting where the exogenous dividend stream is modeled as a random walk with innovations drawn from the family of stable distributions. We derive an exact analytical solution for the fundamental stock price. We evaluate the ability of the model fundamentals and the dividends-driven intrinsic bubbles to explain the observed variation in annual US stock prices. We compare results obtained in this setting with those from the traditional model where all stochastic processes are driven by Gaussian shocks.
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Bibliographic InfoPaper provided by Florida International University, Department of Economics in its series Working Papers with number 0306.
Length: 36 pages
Date of creation: Sep 2003
Date of revision:
Stock prices; present-value model; intrinsic bubbles; fat tails; normal distributions; stable distributions;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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NBER Working Papers
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