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Fama On Bubbles

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  • Tom Engsted

Abstract

Eugene Fama has repeatedly expressed his discontent with the notion of an irrational bubble. However, he has never publicly expressed his opinion on rational bubbles. This is peculiar since such bubbles build naturally from the rational efficient markets paradigm that Fama strongly adheres to. On empirical grounds Fama rejects bubbles by referring to the lack of reliable evidence that price declines are predictable. However, this argument cannot be used to rule out rational bubbles because such bubbles do not necessarily imply return predictability. On data samples that include the 1990s, there is evidence of an explosive component in stock market valuation ratios, consistent with a rational bubble.
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Suggested Citation

  • Tom Engsted, 2016. "Fama On Bubbles," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 370-376, April.
    • Handle: RePEc:bla:jecsur:v:30:y:2016:i:2:p:370-376
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    File URL: http://hdl.handle.net/10.1111/joes.2016.30.issue-2
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    Cited by:

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    3. Utz Weitzel & Christoph Huber & Jürgen Huber & Michael Kirchler & Florian Lindner & Julia Rose & Lauren Cohen, 2020. "Bubbles and Financial Professionals [Margin, short sell, and lotteries in experimental asset markets]," Review of Financial Studies, Society for Financial Studies, vol. 33(6), pages 2659-2696.
    4. GHERBOVEȚ, Sergiu, 2017. "The Poorest In The World Pays For Crisis," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 4(1), pages 141-148.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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