Fundamental bubbles in equity markets

Florian Ielpo () and Mikita Kniahin
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Florian Ielpo: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UNIGESTION
Mikita Kniahin: UNIGESTION, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique

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Abstract: Using an affine model to compute the price of equities based on a dataset of macroeconomic factors, we propose a measure of equity bubbles. We use a dynamic affine term structure framework to price equity and bonds jointly, and investigate how prices are related to a set of macrofactors extracted from a large dataset of economic time series. We analyze the discrepancies between market and model implied equity prices and use them as a measure for bubbles. A bubble is diagnosed over a given period whenever the discrepancies are not stationary and impact the underlying economy consistently with the literature's findings, increasing over the shorter term economic activity before leading to a net loss in it. We perform the analysis over 3 major US and 3 major European equity indices over the 1990–2017 period and find bubbles only for two of the US equity indices, the S&P500 and the Dow Jones. © 2019, Springer-Verlag GmbH Germany, part of Springer Nature.

Keywords: Affine model; Bubble; Data-rich; Principal component analysis; Stationarity (search for similar items in EconPapers)
Date: 2020-09
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Published in Soft Computing, 2020, 24, pp.13769-13796. ⟨10.1007/s00500-019-04514-1⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02800608

DOI: 10.1007/s00500-019-04514-1

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