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Fundamentals and bubbles in asset prices: Evidence from U.S. and Japanese asset prices

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Abstract

This paper investigates the existence and extent of non-fundamental bubbles in both U.S. and Japanese asset prices by employing a flexible empirical method which allows us to decompose asset prices into fundamental and non-fundamental bubble components. This study finds that a substantial fraction of U.S. and Japanese asset prices is accounted for by non-fundamental bubble components and that these asset prices overreact to non-fundamental bubble shocks. In addition, allowing for time-varying interest rates as another fundamental factor does not change any qualitative results about the role of non-fundamental bubble components. This suggests that the present value model fails to explain volatile asset price behavior even with time-varying interest rates.

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Authors and Affiliations

  1. Department of Finance, Carlson School of Management, University of Minnesota, 271 19th Ave. South, 55455, Minneapolis, MN, U.S.A.

    Bong-Soo Lee

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  1. Bong-Soo Lee
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Additional information

This paper was initially written when I was visiting Keio University in Japan. I benefited from several discussions with Mike Dothan, Pat Hess, and Steve LeRoy in my department, Takashi Kaneko, Yukitami Tsuji and Naoyuki Yoshino at Keio University, and Yong-Seok Park at the International University of Japan. Special thanks are due to the anonymous referee and the editor of this journal, who provided many useful and insightful comments that helped to improve the paper. This research was in part supported by a grant from the International Program Development.

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Lee, BS. Fundamentals and bubbles in asset prices: Evidence from U.S. and Japanese asset prices. Financial Engineering and the Japanese Markets 2, 89–122 (1995). https://doi.org/10.1007/BF02425168

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