We introduce imperfect information in stock prices determination. Agents, whose expectations are not assumed to be rational, receive a noisy signal about the structural shock driving future dividend variations. Equilibrium stock prices are decomposed into a fundamental component and a transitory ‘noise bubble’ which can be responsible for boom and bust episodes unrelated to economic fundamentals. We propose a non-standard VAR procedure to estimate the effects of noise shocks as well as bubble episodes. Noise explains a large fraction of US stock prices. In particular the dot-com bubble is almost entirely explained by noise.
Noise Bubbles / Forni, Mario; Gambetti, Luca; Lippi, Marco; Sala, Luca. - In: ECONOMIC JOURNAL. - ISSN 0013-0133. - 127:604(2017), pp. 1940-1976. [10.1111/ecoj.12386]
Noise Bubbles
FORNI, Mario;
2017
Abstract
We introduce imperfect information in stock prices determination. Agents, whose expectations are not assumed to be rational, receive a noisy signal about the structural shock driving future dividend variations. Equilibrium stock prices are decomposed into a fundamental component and a transitory ‘noise bubble’ which can be responsible for boom and bust episodes unrelated to economic fundamentals. We propose a non-standard VAR procedure to estimate the effects of noise shocks as well as bubble episodes. Noise explains a large fraction of US stock prices. In particular the dot-com bubble is almost entirely explained by noise.File | Dimensione | Formato | |
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