On the Inception of Rational Bubbles in Stock Prices / Behzad T. Diba, Herschel I. Grossman.

Format:

Book

Author/Creator:

Diba, Behzad T.

Contributor:

National Bureau of Economic Research.

Grossman, Herschel I.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1990.

NBER working paper series no. w1990

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1986.

Summary:

This paper analyzes the theoretical possibility of rational

bubbles in stock prices in a model in which stockholders have

infinite planning horizons and in which free disposal of equity

rules out the existence of negative rational bubbles. The

analysis shows that in this framework if a positive rational

bubble exists, then it started on the first date of trading of

the stock. Thus, the existence of a rational bubble at any date

would imply that the stock has been overvalued relative to market

fundamentals since the first date of trading and that prior to

the first date of trading potential stockholders who anticipated

the initial pricing of the stock expected that the stock would be

overvalued relative to market fundamentals. The analysis also

shows that any rational bubble will eventually burst and will not

restart. Thus, even if a positive rational bubble exists,

stockholders know that after a random, but almost surely finite,

date the stock price will conform to market fundamentals forever.

Notes:

Print version record

July 1986.