Price Bubbles in Tehran Stock Market: A Dynamic Stochastic General Equilibrium Model

Ehsan Asadi (), Hashem Zare (), Mehrzad Ebrahimi () and Khosrow Piraiee ()
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Ehsan Asadi: Ph.D. Candidate of Economics, Azad Islamic University, Shiraz Branch
Hashem Zare: Assistant Professor of Economics, Azad Islamic University, Shiraz Branch
Mehrzad Ebrahimi: Assistant Professor of Economics, Azad Islamic University, Shiraz Branch
Khosrow Piraiee: Associate Professor of Economics, Azad Islamic University, Shiraz Branch

Quarterly Journal of Applied Theories of Economics, 2019, vol. 6, issue 2, 73-100

Abstract: Although stock market bubbles play an important role in determining stock price and economic fluctuations, their explanation based on fundamental principles of the economy is a challenging task. The purpose of this paper is to identify the factors shaping the price bubbles of the Tehran Stock Exchange according to a Bayesian DSGE model in the real business cycles framework. Stock price bubbles in this model appear endogenously as a positive feedback mechanism that is supported by optimistic beliefs. Based on the obtained results, the sentiment shock was introduced as the most important source of bubbles fluctuations followed by fluctuations in the stock price. This shock reflects households’ beliefs about the relative size of bubbles and is passed to the real economy through credit constraints. This shock also expresses a large part of the fluctuations in output, consumption, and investment. Also, the labor supply shock and the investment-specific technology shock had a dominant role in creating employment and investment fluctuations, respectively

Keywords: Price bubbles; DSGE model; Sentiment shock; Real business cycles (search for similar items in EconPapers)
JEL-codes: E22 E27 E32 E44 G41 (search for similar items in EconPapers)
Date: 2019
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