Asset Price Volatility, Bubbles, and Process Switching
AbstractEvidence of excess volatilities of asset prices compared with those of market fundamentals is often attributed to speculative bubbles. This study examines the sense in which speculative bubbles could in theory lead to excess volatility, hut it demonstrates that some of the variance hounds evidence reported to date precludes bubbles as a reason why asset prices might violate such hounds. The findings must represent some other model misspecffication or market inefficiency. One important misspecification occurs when there searcher incorrectly specifies the time series properties of market fundamentals. A bubble-free example economy characterized by a potential switch in government policies produces paths of asset prices that would appear, to an unwary researcher, to contain bubbles.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1867.
Date of creation: Mar 1986
Date of revision:
Publication status: published as From Journal of Finance, Vol. 41, No. 4, pp. 831-842, (September 1986).
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
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Other versions of this item:
- Flood, Robert P & Hodrick, Robert J, 1986. " Asset Price Volatility, Bubbles, and Process Switching," Journal of Finance, American Finance Association, American Finance Association, vol. 41(4), pages 831-42, September.
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