Popular commentators as well as professional economists-see, for example, Keynes (1936, pp. 154-155)-have long entertained the idea that movements in stock prices can involve "bubbles"-that is, psychologically based responses to extraneous factors. More recently, theorists using the assumption of rational expectations have analyzed formally the formation of asset prices, their incorporation of market fundamentals, and the possible influence of factors that are not part of market fundamentals. In an earlier paper-Diba and Grossman (1985)-we develop a general theoretical case, summarized briefly below, against the existence of rational bubbles. The present paper reports complementary empirical evidence that fluctuations in American stock prices do not incorporate rational bubbles.

No abstract

No abstract

No abstract

No abstract