Models for Rational Speculative Bubbles
Possibly the most controversial issue in finance is whether the financial market is efficient in transmitting information and the allocation of resources or not. A generation ago, a positive view known as the Efficient Market Hypothesis (EMH) was widely accepted by academic financial economists. Many crucial financial issues such as volatility, predictability, speculation and anomalies are also related to the efficiency issue and are all interdependent. The existence of bubbles has been especially controversial since the existence of bubbles contribute to market inefficiency. Binswanger states that ‘speculative bubbles are thought of as having a negative overall impact on the economy. They are supposed to create additional price risk and increase the instability of the economy’ (1999, p. 116). Therefore, in recent years there have been a number of empirical studies attempting to identify rational speculative bubbles in stock prices and returns.
KeywordsStock Market Stock Price Stock Prex Joint Probability Density Function Dividend Yield
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