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Was There a Nasdaq Bubble in the Late 1990s?

  • Lubos Pastor
  • Pietro Veronesi

Not necessarily. The fundamental value of a firm increases with uncertainty about average future profitability, and this uncertainty was unusually high in the late 1990s. We calibrate a stock valuation model that includes this uncertainty, and show that the uncertainty needed to match the observed Nasdaq valuations at their peak is high but plausible. The high uncertainty might also explain the unusually high return volatility of Nasdaq stocks in the late 1990s. Uncertainty has the biggest effect on stock prices when the equity premium is low.

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File URL: http://www.nber.org/papers/w10581.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10581.

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Date of creation: Jun 2004
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Publication status: published as Pastor, Lubos and Pietro Veronesi. "Was There A Nasdaq Bubble In The Late 1990s?," Journal of Financial Economics, 2006, v81(1,Jul), 61-100.
Handle: RePEc:nbr:nberwo:10581
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