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A Bayesian's Bubble

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  • C. WEI LI
  • HUI XUE

Abstract

The acceleration of the U.S. productivity growth in the late 1990s suggests a significant advance in technological innovation, making the perceived probability of entering a "new economy" ever increasing. Based on macroeconomic data, we identify a Bayesian investor's belief evolution when facing a possible structural break in the economy. We show that such belief evolution plays a significant role in explaining both the stock market boom and crash during 1998 to 2001. We conclude that a rational investor's uncertainty about the future of the U.S. economy provides an alternative explanation for the late 1990s stock market "bubble." Copyright (c) 2009 the American Finance Association.

Suggested Citation

  • C. Wei Li & Hui Xue, 2009. "A Bayesian's Bubble," Journal of Finance, American Finance Association, vol. 64(6), pages 2665-2701, December.
  • Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2665-2701
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2009.01514.x
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    Cited by:

    1. Huang, MeiChi, 2014. "Bubble-like housing boom–bust cycles: Evidence from the predictive power of households’ expectations," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 2-16.
    2. Chen, Shyh-Wei & Hsu, Chi-Sheng & Xie, Zixong, 2016. "Are there periodically collapsing bubbles in the stock markets? New international evidence," Economic Modelling, Elsevier, vol. 52(PB), pages 442-451.
    3. Phillips, Peter C.B., 2016. "Modeling speculative bubbles with diverse investor expectations," Research in Economics, Elsevier, vol. 70(3), pages 375-387.

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