Bubbles and fads in the stock market: another look at the experience of the US

Abstract

This paper considers a standard present-value equity price formula where the discount factor is driven by the real return on short-term public debt. We discuss a state-space formulation by which prices can be decomposed into fundamental and non-fundamental components. The model is estimated on annual US data. The stochastic discount factor explains part of the volatility in equity values, but it is not sufficient per se to exclude the occurrence of near-exponential bubbles in the price-dividend ratio. These disappear if the dividend is replaced by a broader measure of the income flow generated by the firms. Copyright © 2006 John Wiley & Sons, Ltd.

U.S. stock prices and the dot.com-bubble: Can dividend policy rescue the efficient market hypothesis?

“…"Since management's choice of dividend policy clearly affects the time-series variation in observed dividends, the development of the relation between the volatility of dividends and rational stock prices requires analysis of the linkage between the largely controllable dividend process and the largely uncontrollable process for intrinsic value. "- Marsh & Merton (1986, p. 488) Alessandri (2006) reports that some indications for the existence of speculative bubbles disappear if dividends are replaced by a broader measure of the fundamental situation of firms. 1…”

“…This empirical study focuses on the broad S&P 500 stock market index and does not consider the NASDAQ. Hence, we examine annual U.S. data from 1871 to 2014-more specifically the dividend payments, corporate earnings and stock prices of the S&P 500 equity index and its predecessors-and construct several different hypothetical dividend time series that control for the dividend policy of these 1 Alessandri (2006) uses Flow of Funds data for the United States instead of S&P dividends. A similar idea has also been presented by Chen, Da & Priestley (2012).…”

Housing bubbles: A tale of two cities

“…He shows that many of the deviations of stock prices from the present-value model are captured as bubbles in his model. Recent studies have used an improved state-space model to test for the existence of bubbles (Alessandri, 2006;Blyth, 2008;Xiao & Tan, 2007). There are, however, very few empirical studies that have applied the state-space model to compare the magnitude of housing bubbles in different cities.…”

“…To solve these problems, we adopt Alessandri's (2006) state-space model to estimate the size of housing bubbles. Following Alessandri's (2006) approach of using dividends to capture market fundamentals in the stock market, we use rent to capture market fundamentals in the housing market. Assuming that the risk premium of investing in housing is constant, the expected total return on housing is …”

Study of Guangzhou House Price Bubble Based on State‐space Model

“…There are plenty researches which use the state space model to study bubble phenomenon: Bertus and Stanhouse (2001) use the model to investigate whether there is a random bubble gold market; Lau et al (2005) and Alessandri (2006) apply it to study stock price bubble situation; Xiao and Tan (2007) combine rent with housing price, and then use the state space model together with the Kalman Filter to examine bubble phenomenon. Similar approach is also applied by Chang et al (2008) to study the real estate phenomenon in Taipei. No literature has adopted the state space model yet to study the real estate bubble phenomenon in China.…”