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Fundamental bubbles in equity markets

Author

Listed:
  • Florian Ielpo

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UNIGESTION)

  • Mikita Kniahin

    (UNIGESTION, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

Using an affine model to compute the price of equities based on a dataset of macroeconomic factors, we propose a measure of equity bubbles. We use a dynamic affine term structure framework to price equity and bonds jointly, and investigate how prices are related to a set of macrofactors extracted from a large dataset of economic time series. We analyze the discrepancies between market and model implied equity prices and use them as a measure for bubbles. A bubble is diagnosed over a given period whenever the discrepancies are not stationary and impact the underlying economy consistently with the literature's findings, increasing over the shorter term economic activity before leading to a net loss in it. We perform the analysis over 3 major US and 3 major European equity indices over the 1990–2017 period and find bubbles only for two of the US equity indices, the S&P500 and the Dow Jones. © 2019, Springer-Verlag GmbH Germany, part of Springer Nature.

Suggested Citation

  • Florian Ielpo & Mikita Kniahin, 2020. "Fundamental bubbles in equity markets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02800608, HAL.
    • Handle: RePEc:hal:cesptp:hal-02800608
    DOI: 10.1007/s00500-019-04514-1
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