The Theory of Rational Bubbles in Stock Prices

Diba, Behzad; Grossman, Herschel I.

doi:10.2307/2233912

Cited by 347 publications

(241 citation statements)

References 10 publications

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“…Measured price distortion reaches up to a 40% overvaluation in the beginning of the sample, according to the direct method (blue, solid), and up to a 20% overvaluation in July 2013 according to the unobserved component method(red, dotted). Moreover, there seem to be periods where the bubble component is found to be negative, thus violating the argument made by Diba and Grossman (1988b) about the impossibility of negative bubbles. This highlights the di culty in measuring bubbles as residuals since these can also be the result of a misspeci cation of the model, and there is no easy way of distinguishing between the two (Gürkaynak, 2008).…”

Section: A Comparison With Other Detection Methodsmentioning

confidence: 64%

Testing for a Housing Bubble at the National and Regional Level: The Case of Israel

Caspi¹

2015

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Between 2008 and 2013, home prices in Israel appreciated by roughly 50 percent in real terms, with increases of nearly 60 percent in some regions. This paper examines whether this phenomenon reflects the presence of a national or regional housing bubble by applying econometric tests for explosive behavior to quality adjusted national and regional level data on the home price to rent ratio, while controlling for various fundamental factors, including interest rates, income and the leverage ratio. Overall, study results indicate that the recent housing price appreciations at the national and regional levels are consistent with the developments of the fundamentals -supply and demand factors that are represented by rent payments and interest rates -and not with a housing bubble scenario. Most of the results are robust to a variety of tests and alternate specifications. The framework I provide to study the Israeli case may be applied to study other housing markets facing similar developments.

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Section: A Comparison With Other Detection Methodsmentioning

confidence: 64%

Testing for a Housing Bubble at the National and Regional Level: The Case of Israel

Caspi¹

2015

gwp

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“…Such investigations include approaches based on variance bounds (see, for example, Shiller, 1981), tests for a bubble premium (Hardouvelis, 1988), tests based on cointegration analysis (Diba and Grossman, 1988), and tests based on regime switching models (van Norden, 1996). The latter of these approaches is a direct test for the presence of bubbles, whereas the former three are indirect tests that examine the distributional properties of prices and of fundamental measures.…”

Section: Introductionmentioning

confidence: 99%

Speculative bubbles and the cross-sectional variation in stock returns

Anderson

Brooks

2014

International Review of Financial Analysis

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Evidence suggests that rational, periodically collapsing speculative bubbles may be pervasive in stock markets globally, but there is no research that considers them at the individual stock level. In this study we develop and test an empirical asset pricing model that allows for speculative bubbles to affect stock returns. We show that stocks incorporating larger bubbles yield higher returns. The bubble deviation, at the stock level as opposed to the industry or market level, is a priced source of risk that is separate from the standard market risk, size and value factors. We demonstrate that much of the common variation in stock returns that can be attributable to market risk is due to the co-movement of bubbles rather than being driven fundamentals. EFM classification codes: 310, 330, 350 Acknowledgements: We are grateful to Rajesh Tharyan for providing a list of SEDOL codes matched with those from Datastream, and to Apostolos Katsaris, discussions with whom helped to shape the ideas for this paper.1

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“…This expectational difference equation is identical to the rational bubble condition in Diba and Grossman (1988). As a result, the rational bubble will have the same properties given in Diba and Grossman: first, the bubble can never be negative; and second, once a bubble ends it cannot be started again.…”

Section: Corollary 1 R T+1 = II T Mri Tmentioning

confidence: 53%

Ownership of Capital in Monetary Economies and the Inflation Tax on Equity

1998

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Financial instruments are subject to inflation taxes on the wealth they represent and on the nominal income flows they provide. This paper explicitly introduces financial instruments into the standard stochastic growth model with money and production and shows that the value of the firm in this case is equal to the firm's capital stock divided by inflation. The resulting asset-pricing conditions indicate that the effect of inflation on asset returns differs from the effects found in other papers by the addition of a significant wealth tax.

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The Theory of Rational Bubbles in Stock Prices

Cited by 347 publications

References 10 publications

Testing for a Housing Bubble at the National and Regional Level: The Case of Israel

Testing for a Housing Bubble at the National and Regional Level: The Case of Israel

Speculative bubbles and the cross-sectional variation in stock returns

Ownership of Capital in Monetary Economies and the Inflation Tax on Equity

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