Working Paper: NBER ID: w10581
Authors: Lubos Pastor; Pietro Veronesi
Abstract: Not necessarily. The fundamental value of a firm increases with uncertainty about average future profitability, and this uncertainty was unusually high in the late 1990s. We calibrate a stock valuation model that includes this uncertainty, and show that the uncertainty needed to match the observed Nasdaq valuations at their peak is high but plausible. The high uncertainty might also explain the unusually high return volatility of Nasdaq stocks in the late 1990s. Uncertainty has the biggest effect on stock prices when the equity premium is low.
Keywords: NASDAQ; bubble; stock valuation; uncertainty; equity premium
JEL Codes: G0; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uncertainty about average profitability (D89) | market-to-book ratio (MB) (G32) |
| increase in uncertainty (D89) | market-to-book ratio (MB) (G32) |
| high uncertainty during late 1990s (D89) | high valuations of NASDAQ stocks (G24) |
| high uncertainty (D89) | high return volatility of NASDAQ stock prices (G17) |
| higher market-to-book ratios (G32) | higher return volatilities (G17) |