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Intrinsic Bubbles: The Case of Stock Prices

Kenneth A. Froot and Maurice Obstfeld
The American Economic Review
Vol. 81, No. 5 (Dec., 1991), pp. 1189-1214
Stable URL: http://www.jstor.org/stable/2006913
Page Count: 26
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Abstract

Several puzzling aspects of the behavior of United States stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends. We call bubbles of this type "intrinsic" bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors. Intrinsic bubbles provide a more plausible empirical account of deviations from present-value pricing than do the traditional examples of rational bubbles. Their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods.

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