Rational Bubbles in the Stock Market: Accounting for the U.S. Stock-Price Volatility

Yangru Wu ()

Economic Inquiry, 1997, vol. 35, issue 2, 309-19

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. The author finds that the bubble components estimated account for a substantial portion of U.S. 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. Copyright 1997 by Oxford University Press.

Date: 1997
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