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Intrinsic Bubbles: The Case of Stock Prices

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  • Kenneth A. Froot
  • Maurice Obstfeld

Abstract

Several puzzling aspects of the behavior of United States stock prices can be explained by the presence of a specific type of rational bubble that depends exclusively on dividends. We call such bubbles "intrinsic" bubbles because they derive all of their variability from exogenous economic fundamentals, and none from extraneous factors. Unlike the most popular examples of rational bubbles, intrinsic bubbles provide an empirically plausible account of deviations from present-value pricing. Their explanatory potential comes partly from their ability to generate persistent deviations that appear relatively stable over long periods.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3091.

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Date of creation: Sep 1989
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Publication status: published as The American Economic Review, Vol. 81, No. 5, pp. 1189-1214, (December 1991).
Handle: RePEc:nbr:nberwo:3091

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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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