Fama on bubbles

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Eugene Fama has repeatedly expressed his discontent with the notion of an irrational bubble. However, he has never publicly expressed his opinion on irrational bubbles. This is peculiar since such bubbles build naturally from the rational efficient markets paradigm that Fama strongly adheres to. On empirical grounds Fama rejects bubbles by referring to the lack of reliable evidence that price declines are predictable. However, this argument cannot be used to rule out rational bubbles because such bubbles do not necessarily imply return predictability. On data samples that include the 1990s, there is evidence of an explosive component in stock market valuation ratios, consistent with a rational bubble.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider13
StatusUdgivet - 2 sep. 2014
SerietitelCREATES Research Papers
Nummer2014-28

    Forskningsområder

  • Eugene Fama, irrational and rational bubbles, return predictability, explosive stock prices

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