Fama on bubbles

Tom Engsted

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Eugene Fama has repeatedly expressed his discontent with the notion of an irrational bubble. However, he has never publicly expressed his opinion on rational bubbles. This is peculiar since such bubbles build naturally from the rational efficient markets paradigm that Fama strongly adheres to. On empirical grounds Fama rejects bubbles by referring to the lack of reliable evidence that price declines are predictable. However, this argument cannot be used to rule out rational bubbles because such bubbles do not necessarily imply return predictability. On data samples that include the 1990s, there is evidence of an explosive component in stock market valuation ratios, consistent with a rational bubble.

Keywords: Eugene Fama; irrational and rational bubbles; return predictability; explosive stock prices (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 11
Date: 2014-08-31
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Journal Article: FAMA ON BUBBLES (2016)
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