DotComMania: The Rise and Fall of Internet Stock Prices

Abstract

participants at MIT, NYU and the NBER summer institute for helpful comments and suggestions.2 ABSTRACT This paper provides one potential explanation for the rise, persistence and eventual fall of internet stock prices. Specifically, we appeal to a model of heterogenous agents with varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that "optimistic" investors overwhelm "pessimistic" ones, leading to prices not reflecting fundamental values about cash flows summarized by aggregate beliefs. Empirical support for this explanation is provided by exploring the behavior of internet stock prices during the period January 1998 to November 2000. In particular, we document four important elements to our story: (i) the high level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to a shift towards potentially optimistic investors, (iii) empirical results consistent with shorting being at its maximum possible level for internet stocks, and (iv) the eventual fall, or bubble bursting, of internet stocks being tied to the increase in the number of sellers to the market via expiration of lockup agreements.3

Why are Securitization Issues Tranched?

“…Such market segmentation could be due to limits on arbitrage (see for example Shleifer and Vishny (1997)). Also, imperfect arbitrage has been documented in other financial markets (Froot and Dabora (1999), Richardson and Ofek (2001), Wurglar and Zhuravskaya (2001)). At a more informal level, market incompleteness may vary over time as investor sophistication increases.…”

Bubble, critical zone and the crash of Royal Ahold

“…In the wake of the worldwide stock markets bubbles followed by crashes or 'antibubbles' of the second half of the 1990s and early 2000s, the analysis of such critical phenomena in aggregate stock markets has been intensified; see for instance (Abreu, 2001;Richardson and Ofek, 2001;Visano, 2002;Caballero and Hammour, 2002;Bohl, 2003;Brooks and Katsaris, 2003;Siegel, 2003;Scheinkman and Xiong, 2003;Griffin et al, 2003;Brunnermeier and Nagel, 2003;Chari and Kehoe, 2003;Kaizoji, 2004;Engsted and Tanggaard, 2004). A series of synthesis papers (including Kindleberger (2000), Shefrin (2000), Shiller (2000), Shleifer (2000), ) have pointed out the role of collective behaviors, such as herding and optimism feedback on itself, in the development of bubbles in aggregate markets.…”