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Rational Bubbles in the Stock Market: Accounting for the U.S. Stock-Price Volatility

  • Wu, Yangru

Can rational stochastic asset bubbles help explain the excess volatility of stock prices? The bubble considered here is treated as an unobserved state vector in the state-space model and is easily estimated using the Kalman filter. The author finds that the bubble components estimated account for a substantial portion of U.S. stock prices, and the model does a credible job in fitting the data, especially during several bull and bear markets in this century. Much of the deviation of stock prices from the present-value model are captured by the bubble. Copyright 1997 by Oxford University Press.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 35 (1997)
Issue (Month): 2 (April)
Pages: 309-19

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Handle: RePEc:oup:ecinqu:v:35:y:1997:i:2:p:309-19
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