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Stocks as Money: Convenience Yield and the Tech-Stock Bubble

  • John H. Cochrane

What caused the rise and fall of tech stocks? I argue that a mechanism much like the transactions demand for money drove many stock prices above the 'fundamental value' they would have had in a frictionless market. I start with the Palm/3Com microcosm and then look at tech stocks in general. High prices are associated with high volume, high volatility, low supply of shares, wide dispersion of opinion, and restrictions on long-term short selling. I review competing theories, and only the convenience yield view makes all these connections.

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File URL: http://www.nber.org/papers/w8987.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8987.

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Date of creation: Jun 2002
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Publication status: published as Hunter, William C., George G. Kaufman, and Michael Pomerleano (eds.) Asset price bubbles: The implications for monetary, regulatory, and international policies. Cambridge and London: MIT Press, 2003.
Handle: RePEc:nbr:nberwo:8987
Note: AP EFG
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  1. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
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  12. 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.
  13. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  14. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July.
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  16. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
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