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Stocks as Money: Convenience Yield and the Tech-Stock Bubble

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John H. Cochrane

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Abstract

What caused the rise and fall of tech stocks? I argue that a mechanism much like the transactions demand for money drove many stock prices above the 'fundamental value' they would have had in a frictionless market. I start with the Palm/3Com microcosm and then look at tech stocks in general. High prices are associated with high volume, high volatility, low supply of shares, wide dispersion of opinion, and restrictions on long-term short selling. I review competing theories, and only the convenience yield view makes all these connections.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8987.

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Date of creation: Jun 2002
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Handle: RePEc:nbr:nberwo:8987

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G1 - Financial Economics - - General Financial Markets

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  3. Jun Liu & Francis Longstaff, 2000. "Losing Money on Arbitrages: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities," University of California at Los Angeles, Anderson Graduate School of Management 1054, Anderson Graduate School of Management, UCLA. [Downloadable!]
  4. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June. [Downloadable!] (restricted)
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  5. Lasse Pedersen & Darrell Duffie & Nicolae Garleanu, 2004. "Valuation in Dynamic Bargaining Markets," Econometric Society 2004 North American Winter Meetings 649, Econometric Society.
  6. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May. [Downloadable!] (restricted)
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  8. Nicholas Barberis & Andrei Shleifer & Jeffrey Wurgler, 2002. "Comovement," NBER Working Papers 8895, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Malcolm Baker & Jeremy C. Stein, 2002. "Market Liquidity as a Sentiment Indicator," NBER Working Papers 8816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
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  11. Malcolm Baker & Jeremy C. Stein, 2002. "Market Liquidity as a Sentiment Indicator," Harvard Institute of Economic Research Working Papers 1977, Harvard - Institute of Economic Research. [Downloadable!]
  12. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(1), pages 1-33, March.
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  13. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October. [Downloadable!] (restricted)
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  16. John Fernald & John H. Rogers, 1998. "Puzzles in the Chinese stock market," International Finance Discussion Papers 619, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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Cited by:
(explanations, 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.)

  1. Guerdjikova, Ani, 2006. "Portfolio Choice and Asset Prices in an Economy Populated by Case-Based Decision Makers," Working Papers 06-13, Cornell University, Center for Analytic Economics. [Downloadable!]
  2. Jianping Mei & Jose Scheinkman & Wei Xiong, 2005. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," NBER Working Papers 11362, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," Levine's Bibliography 122247000000000861, UCLA Department of Economics. [Downloadable!]
    Other versions:
  4. Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. J. Scheinkman & W. Xiong, 2002. "Overconfidence, Short-Sale Constraints and Bubbles," Princeton Economic Theory Working Papers 98734966f1c1a57373801367f, David K. Levine. [Downloadable!]
  6. Jianping Mei & Jose Scheinkman & Wei Xiong, 2005. "Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia," Levine's Bibliography 122247000000000867, UCLA Department of Economics. [Downloadable!]
  7. Guerdjikova, Ani, 2004. "Asset Prices in an Overlapping Generations Model with Case-Based Decision Makers with Short Memory," Sonderforschungsbereich 504 Publications 04-44, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  8. Benjamin Eden, 2006. "International Seigniorage Payments," Working Papers 0622, Department of Economics, Vanderbilt University. [Downloadable!]
  9. Eli Ofek & Matthew Richardson & Robert F. Whitelaw, 2003. "Limited Arbitrage and Short Sales Restrictions: Evidence from the Options Markets," NBER Working Papers 9423, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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