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Bubbles and fads in the stock market: another look at the experience of the US
Author(s) -
Alessandri Piergiorgio
Publication year - 2006
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.292
Subject(s) - economics , dividend , financial economics , econometrics , stochastic discount factor , equity (law) , volatility (finance) , debt , present value , discounting , stock (firearms) , monetary economics , capital asset pricing model , macroeconomics , finance , mechanical engineering , political science , law , engineering
Abstract This paper considers a standard present‐value equity price formula where the discount factor is driven by the real return on short‐term public debt. We discuss a state‐space formulation by which prices can be decomposed into fundamental and non‐fundamental components. The model is estimated on annual US data. The stochastic discount factor explains part of the volatility in equity values, but it is not sufficient per se to exclude the occurrence of near‐exponential bubbles in the price‐dividend ratio. These disappear if the dividend is replaced by a broader measure of the income flow generated by the firms. Copyright © 2006 John Wiley & Sons, Ltd.