Dectecting speculative bubbles in stock prices: A new approach and some evidence for the US

Martin T. Bohl and Pierre Siklos

No 01-3, Research Notes from Deutsche Bank Research

Abstract: A large part of the current debate on US stock price behavior concentrates on the question of whether stock prices are driven by fundamentals or by non-fundamental factors. In this paper we put forward the hypothesis that a present value model with time-varying expected returns provides an empirically valid description of US stock price behavior in the long-run, while short-run deviations of actual share prices from present value prices are driven by nonfundamental factors like speculative bubbles and/or noise trading behavior. Our empirical findings for the US stock market covering the 1871:1 - 2000:12 period provide strong and robust support for the hypothesis that in the short-run US stock prices exhibit nonfundamental run-ups followed by crashes, while in the long-run US share prices adhere to fundamentals.

Keywords: Present Value Model; US Stock Prices; Asymmetric Adjustment; Cointegration (search for similar items in EconPapers)
JEL-codes: C32 E44 G12 (search for similar items in EconPapers)
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:dbrrns:013

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