Working Paper: NBER ID: w3091
Authors: Kenneth A. Froot; Maurice Obstfeld
Abstract: Several puzzling aspects of the behavior of United States stock prices can be explained by the presence of a specific type of rational bubble that depends exclusively on dividends. We call such bubbles "intrinsic" bubbles because they derive all of their variability from exogenous economic fundamentals, and none from extraneous factors. Unlike the most popular examples of rational bubbles, intrinsic bubbles provide an empirically plausible account of deviations from present-value pricing. Their explanatory potential comes partly from their ability to generate persistent deviations that appear relatively stable over long periods.
Keywords: Intrinsic bubbles; Stock prices; Dividends; Present-value pricing
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividends (G35) | stock prices (G12) |
| intrinsic bubbles (E32) | stock prices (G12) |
| stable fundamentals (C62) | stock prices (G12) |
| intrinsic bubbles (E32) | deviations from present-value pricing (D46) |
| overreaction of prices to changes in dividends (G35) | intrinsic bubbles (E32) |