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Rational Speculative Bubbles: An Empirical Investigation of the London Stock Exchange
Author(s) -
Brooks Chris,
Katsaris Apostolos
Publication year - 2003
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/1467-8586.00179
Subject(s) - economics , dividend , econometrics , equity (law) , stock exchange , bubble , cointegration , financial economics , stock (firearms) , ex ante , divergence (linguistics) , stock market bubble , economic bubble , empirical research , empirical evidence , monetary economics , keynesian economics , stock market , mathematics , finance , statistics , physics , mechanics , engineering , paleontology , epistemology , philosophy , law , linguistics , horse , biology , political science , mechanical engineering
In recent years, a sharp divergence of London Stock Exchange equity prices from dividends has been noted. In this paper, we examine whether this divergence can be explained by reference to the existence of a speculative bubble. Three different empirical methodologies are used: variance bounds tests, bubble specification tests, and cointegration tests based on both ex post and ex ante data. We find that, stock prices diverged significantly from their fundamental values during the late 1990's, and that this divergence has all the characteristics of a bubble.