RATIONAL BUBBLES IN THE STOCK MARKET: ACCOUNTING FOR THE U.S. STOCK‐PRICE VOLATILITY

WU YANGRU

86 citations0/0 files storedEconomic Inquiry

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Economic theories and models

Abstract

Can rational stochastic asset bubbles help explain the excess volatility of stock prices? The bubble considered here is treated as an unobserved state vector in the state‐space model and is easily estimated using the Kalman filter. I find that the bubble components estimated account for a substantial portion of US. stock prices, and the model does a credible job in fitting the data, especially during several bull and bear markets in this century. Much of the deviation of stock prices from the present‐value model are captured by the bubble.

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References

1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1988Testing for a Unit Root in Time Series Regression 1980Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?1988The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors 1984Testing for Unit Roots in Autoregressive-Moving Average Models of Unknown Order 1988Stock Prices, Earnings, and Expected Dividends 1986The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors 1987Cointegration and Tests of Present Value Models

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