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Intrinsic Bubbles: The Case of Stock Prices

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  • Froot, Kenneth A
  • Obstfeld, Maurice

Abstract

Several puzzling aspects of the behavior of United States stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends. The authors call bubbles of this type "intrinsic" bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors. Intrinsic bubbles provide a more plausible empirical account of deviations from present-value pricing than do the traditional examples of rational bubbles. Their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods. Copyright 1991 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 81 (1991)
Issue (Month): 5 (December)
Pages: 1189-214

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Handle: RePEc:aea:aecrev:v:81:y:1991:i:5:p:1189-214
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  17. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Stochastic Process Switching: Some Simple Solutions," Econometrica, Econometric Society, vol. 59(1), pages 241-50, January.
  18. Cumby, Robert E. & Huizinga, John & Obstfeld, Maurice, 1983. "Two-step two-stage least squares estimation in models with rational expectations," Journal of Econometrics, Elsevier, vol. 21(3), pages 333-355, April.
  19. M. Mufakharul Islam, 1986. "Discussion," The Indian Economic & Social History Review, , vol. 23(2), pages 217-226, June.
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  23. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 457-510.
  24. Kenneth D. West, 1986. "A Specification Test for Speculative Bubbles," NBER Working Papers 2067, National Bureau of Economic Research, Inc.
  25. Gourieroux, C & Laffont, J J & Monfort, Alain, 1982. "Rational Expectations in Dynamic Linear Models: Analysis of the Solutions," Econometrica, Econometric Society, vol. 50(2), pages 409-25, March.
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