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Is There Irrational Exuberance?

  • Chulsoo Kim


    (Department of Economics, Sookmyung Women¡¯s University)

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    This paper presents a framework in which we can examine whether stock prices are overvalued or undervalued. This paper estimates equilibrium stock prices based on the Lucas (1978) tree model using the Hansen and Sargent (1980) cross-equation restriction approach and the VAR approach. By comparing equilibrium stock prices with actual stock prices, we can judge whether stock prices are overvalued or undervalued. This paper finds that Korean stock prices for the period 1983:1 to 2002:3 were valued substantially more than their equilibrium prices while US stock prices for the period 1871:1 to 2001:9 were on average valued substantially less than their equilibrium prices.

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    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 29 (2004)
    Issue (Month): 2 (December)
    Pages: 65-80

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    Handle: RePEc:jed:journl:v:29:y:2004:i:2:p:65-80
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    1. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    2. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
    3. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    4. Frederick R. Macaulay, 1938. "Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856," NBER Books, National Bureau of Economic Research, Inc, number maca38-1, July.
    5. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
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