The Japanese Bubble: A 'Heterogeneous' Approach
Employing the neutral Kindleberger definition of a bubble as "an upward price movement over an extended range that then implodes", this paper explores the causes of the "Japanese Bubble" of 1985 to 1990 without precluding the possibility that the bubble was due to perceptions of fundamentals. Survey evidence indicates that at the peak of the bubble in the second half of 1989, the majority of Japanese institutional investors thought that the Nikkei was not overvalued relative to fundamentals. Such a belief was not entirely unfounded. Long-term real interest rates fell sharply between 1985 and 1986, and the view that there was a significant increase in the permanent component of the growth rate was defensible though certainly not undeniable. Invoking the literature on asset prices with heterogeneous beliefs and limitations on short sales, the paper argues that in a period characterized by the arrival of news that is difficult to digest and subject to multiple interpretations, it is the more optimistic assessments of fundamentals that are likely to be reflected in the market equilibrium. At the same time, high prices resulting from the heterogeneity phenomenon are fragile and prone to collapse. From this vantage point it is perhaps not surprising that the Japanese Bubble, as well as the subsequent implosion, appeared when they did. Survey evidence on investor beliefs during the bubble period, as well as the covariation of price and volume, lend some support to the heterogeneity approach.
|Date of creation:||Jun 2009|
|Date of revision:|
|Note:||AP EFG ME|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002.
"Breadth of ownership and stock returns,"
Journal of Financial Economics,
Elsevier, vol. 66(2-3), pages 171-205.
- Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
- Lubos PÁstor & Veronesi Pietro, 2003.
"Stock Valuation and Learning about Profitability,"
Journal of Finance,
American Finance Association, vol. 58(5), pages 1749-1790, October.
- Pástor, Luboš & Veronesi, Pietro, 2002. "Stock Valuation and Learning about Profitability," CEPR Discussion Papers 3410, C.E.P.R. Discussion Papers.
- Lubos Pastor & Pietro Veronesi, 2002. "Stock Valuation and Learning about Profitability," NBER Working Papers 8991, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:15052. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.