Asset Price Bubbles and the Land of Oz

Abstract

The conventional view in the professional finance community is that we live in a world with only rare asset price bubbles of immense magnitude. Instead, in this article the author argues that price bubbles are a common phenomenon, and that most stocks have small price bubbles representing perhaps 1% to 25% of their value. The theoretical underpinnings for this argument are based on the local martingale theory of bubbles and a recent article by the author where he derives a multiple-factor asset-pricing model with asset price bubbles. In this article, the author reviews the previous piece and uses it to support his assertion.

TOPICS: Analysis of individual factors/risk premia, theory