Fundamental bubbles in equity markets

  • Florian IelpoEmail author
  • Mikita Kniahin


Using an affine model to compute the price of equities based on a dataset of macroeconomic factors, we propose a measure of equity bubbles. We use a dynamic affine term structure framework to price equity and bonds jointly, and investigate how prices are related to a set of macrofactors extracted from a large dataset of economic time series. We analyze the discrepancies between market and model implied equity prices and use them as a measure for bubbles. A bubble is diagnosed over a given period whenever the discrepancies are not stationary and impact the underlying economy consistently with the literature’s findings, increasing over the shorter term economic activity before leading to a net loss in it. We perform the analysis over 3 major US and 3 major European equity indices over the 1990–2017 period and find bubbles only for two of the US equity indices, the S&P500 and the Dow Jones.


Bubble Affine model Principal component analysis Data-rich Stationarity 

JEL Classification

G12 C58 E44 


Compliance with ethical standards

Conflict of interest

Florian Iepo declares that he has no conflict of interest. Mikita Knihain declares that he has no conflict of interest.

Ethical approval

This article does not contain any studies with human participants or animals performed by any of the authors.

Supplementary material


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.UnigestionGenevaSwitzerland
  2. 2.Centre d’Economie de la SorbonneParisFrance

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