Open AccessNoise Bubbles
Author(s) -
Forni Mario,
Gambetti Luca,
Lippi Marco,
Sala Luca
Publication year - 2017
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/ecoj.12386
Subject(s) - economics , bubble , dividend , bust , imperfect , econometrics , stock (firearms) , noise (video) , shock (circulatory) , monetary economics , boom , stock market bubble , financial economics , computer science , physics , stock market , finance , engineering , mechanics , philosophy , artificial intelligence , environmental engineering , image (mathematics) , linguistics , horse , biology , paleontology , medicine , mechanical engineering
We introduce imperfect information in stock prices determination. Agents, whose expectations are not assumed to be rational, receive a noisy signal about the structural shock driving future dividend variations. Equilibrium stock prices are decomposed into a fundamental component and a transitory ‘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 effects of noise shocks as well as bubble episodes. Noise explains a large fraction of US stock prices. In particular the dot‐com bubble is almost entirely explained by noise.