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Fama on bubbles

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  • Tom Engsted

    () (Aarhus University and CREATES)

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.

Suggested Citation

  • Tom Engsted, 2014. "Fama on bubbles," CREATES Research Papers 2014-28, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2014-28
    as

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    File URL: ftp://ftp.econ.au.dk/creates/rp/14/rp14_28.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Eugene Fama; irrational and rational bubbles; return predictability; explosive stock prices;

    JEL classification:

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

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