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A Bayesian's Bubble

  • C. WEI LI
  • HUI XUE
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    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.

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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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    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 64 (2009)
    Issue (Month): 6 (December)
    Pages: 2665-2701

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    Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2665-2701
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