Working Paper: NBER ID: w8987
Authors: John H. Cochrane
Abstract: What caused the rise and fall of tech stocks? I argue that a mechanism much like the transactions demand for money drove many stock prices above the 'fundamental value' they would have had in a frictionless market. I start with the Palm/3Com microcosm and then look at tech stocks in general. High prices are associated with high volume, high volatility, low supply of shares, wide dispersion of opinion, and restrictions on long-term short selling. I review competing theories, and only the convenience yield view makes all these connections.
Keywords: Tech Stocks; Convenience Yield; Asset Price Bubbles
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High prices (D49) | High trading volume (G15) |
| Low supply of shares (G19) | Convenience yield (D26) |
| High prices (D49) | Further inflated prices (E31) |
| Decline in speculative demand and increase in supply of shares (G19) | Lower prices (D49) |
| Increase in money supply and decrease in transactions demand (E41) | Reduced convenience yield (D24) |
| High stock prices (G19) | High trading volumes (G15) |