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Journal of Economic Perspectives: Vol. 4 No. 2 (Spring 1990)

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On Testing for Speculative Bubbles

Article Citation

Flood, Robert P., and Robert J. Hodrick. 1990. "On Testing for Speculative Bubbles." Journal of Economic Perspectives, 4(2): 85-101.

DOI: 10.1257/jep.4.2.85

Abstract

The possibility that movements in prices could be due to the self-fulfilling prophecies of market participants has long intrigued observers of free markets. This paper surveys the current state of the empirically-oriented literature concerning rational dynamic indeterminacies, by which we mean a situation of self-fulfilling prophecy within a rational expectations model. Empirical work in this area concentrates primarily on indeterminacies in price levels, exchange rates, and equity prices. We first examine a particular type of explosive indeterminacy, usually called a rational bubble, in an example of the market for equities. Then, we consider empirical work relating to price-level and exchange-rate indeterminacies and empirical studies of indeterminacies in stock prices. Finally, we take up some interpretive issues.

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Authors

Flood, Robert P. (IMF)
Hodrick, Robert J. (Northwestern U)

JEL Classifications

313: Capital Markets: Theory, Including Portfolio Selection, and Empirical Studies Illustrating Theory
431: Exchange Rates and Markets--Theory and Studies

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