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Noise Bubbles

Mario Forni (), Luca Gambetti (), Marco Lippi () and Luca Sala ()

No 9532, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We introduce noisy information into a standard present value stock price model. Agents receive a noisy signal about the structural shock driving future dividend variations. The resulting equilibrium stock price includes a transitory component — the "noise bubble" — which can be responsible for boom and bust episodes unrelated to economic fundamentals. We propose a non-standard VAR procedure to estimate the structural shock and the "noise" shock, their impulse response functions and the bubble component of stock prices. We apply such procedure to US data and find that noise explains a large fraction of stock price volatility. In particular the dot-com bubble is entirely explained by noise. On the contrary the stock price boom peaking in 2007 is not a bubble, whereas the following stock market crisis is largely due to negative noise shocks.

Keywords: Noise shocks; Rational bubbles; Structural VARs (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Date: 2013-06
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Journal Article: Noise Bubbles (2017) Downloads
Working Paper: Noise Bubbles (2014) Downloads
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