On Testing for Speculative Bubbles
AbstractThe 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.
CitationFlood, 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
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