Hostname: page-component-586b7cd67f-vdxz6 Total loading time: 0 Render date: 2024-12-04T09:59:19.319Z Has data issue: false hasContentIssue false
  • English
  • Français

Bubbles, Stock Returns, and Duration Dependence

Published online by Cambridge University Press:  06 April 2009

Grant McQueen  and
Steven Thorley
Get access Rights & Permissions [Opens in a new window]

Abstract

A new testable implication is derived from the rational speculative bubbles model stating that the presence of bubbles implies positive duration dependence in runs of high returns. Specifically, the probability of observing an end to a run of high returns declines with the length of the run. Traditional duration dependence tests are adapted for use with discrete stock runs data and, consistent with the existence of bubbles, evidence of duration dependence in monthly real stock returns is found.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 29 , Issue 3 , September 1994 , pp. 379 - 401
Copyright
Copyright © School of Business Administration, University of Washington 1994

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Allen, R, and Gorton, G.. “Churning Bubbles.” Review of Economic Studies, 60 (1993), 813–836.CrossRefGoogle Scholar
Bhattacharyya, S., and Lipman, B.. “Ex Ante versus Interim Rationality and the Existence of Bubbles.” Working Paper, Carnegie Mellon Univ. (1990).Google Scholar
Blanchard, O. J., and Watson, M. W.. “Bubbles, Rational Expectations, and Financial Markets.” In Crisis in the Economic and Financial System, Wachtel, P., ed. Lexington, MA: Lexington Books (1982).Google Scholar
Bollerslev, T., and Hodrick, R. J.. “Financial Market Efficiency Tests.” Working Paper No. 132, Kellogg Graduate School of Management, Northwestern Univ. (1992).CrossRefGoogle Scholar
Brock, W. A. “Speculative Hyperinflations in Maximizing Models: Corrigendum and Clarification.” Working Paper, Univ. of Wisconsin, Madison (1982).Google Scholar
Camerer, C. “Bubbles and Fads in Asset Prices: A Review of Theory and Evidence.” Journal of Economic Surveys, 3 (01 1989), 3–41.CrossRefGoogle Scholar
Diba, B. T., and Grossman, H. I.. “On the Inception of Rational Bubbles.” Quarterly Journal of Economics, 102 (08 1987), 697–700.CrossRefGoogle Scholar
Diba, B. T., and Grossman, H. I.. “Rational Inflationary Bubbles.” Journal of Monetary Economics, 21 (01 1988), 35–46.CrossRefGoogle Scholar
Evans, G. W. “A Test for Speculative Bubbles in the Sterling Dollar Exchange Rate: 1981–1984.” American Economic Review, 76 (09 1986), 621–636.Google Scholar
Fama, E. R., and French, K. R.. “Permanent and Temporary Components of Stock Prices.” Journal of Political Economy, 96 (04 1988), 246–2.73.CrossRefGoogle Scholar
Fama, E. R., and French, K. R.. “Business Conditions and Expected Returns on Stocks and Bonds.” Journal of Financial Economics, 25 (11 1989), 23–49.CrossRefGoogle Scholar
Flavin, M. “Excess Volatility in Financial Markets: A Rcassessment of the Empirical Evidence.” Journal of Political Economy, 91 (12 1983), 929–956.CrossRefGoogle Scholar
Flood, R. P., and Garber, P. M.. “Market Fundamentals versus Price Level Bubbles: The First Test.” Journal of Political Economy, 88 (08 1980), 745–770.CrossRefGoogle Scholar
Flood, R. P.; Hodrick, R. J.; and Kaplan, P.. “An Evaluation of Recent Evidence on Stock Market Bubbles.” Working Paper, Northwestern Univ. (05 1987).Google Scholar
Garber, P. M. “Famous First Bubbles.” Journal of Economic Perspective, 4 (Spring 1990), 35–54.CrossRefGoogle Scholar
Hardouvelis, G. H. “Evidence on Stock Market Speculative Bubbles: Japan, the United States, and Great Britain.” Quarterly Review, Federal Reserve Bank of New York, (Summer 1988), 4–16.Google Scholar
Ibbotson, R. G., and Associates. Stocks, Bonds, Bills, and Inflation 1991 Yearbook. Chicago, IL: Ibbotson Associates (1991).Google Scholar
Kaplan, E., and Meier, P.. “Nonparametric Estimation from Incomplete Observations.” Journal of the American Statistical Association, 53 (1958), 457–81.CrossRefGoogle Scholar
Kiefer, N. M. “Economic Duration Data and Hazard Function.” Journal of Economic Literature, 26 (06 1988), 646–679.Google Scholar
Kim, M.; Nelson, C.; and Startz, R.. “Mean Reversion in Stock Prices? A Reappraisal of Empirical Evidence.” Review of Economic Studies, 58 (05 1991), 515–528.CrossRefGoogle Scholar
Kleidon, A. W. “Variance Bounds Tests and Stock Price Valuation Models.” Journal of Political Economy, 94 (10. 1986), 953–1001.CrossRefGoogle Scholar
LeRoy, S. F., and Porter, R. D.. “The Present-Value Relation: Tests Based on Implied-Variance Bounds. Econometrica, 49 (05 1981), 555–574.CrossRefGoogle Scholar
Ljung, G. M., and Box, G. E. P.. “On a Measure of Lack of Fit in Time Series Models.” Biometrika, 65 (1978), 297–303.CrossRefGoogle Scholar
Lo, A., and MacKinlay, A.. “Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test.” Review of Financial Studies, 1 (Spring 1988), 897–916.CrossRefGoogle Scholar
Marsh, T. A, and Merton, R. C.. “Dividend Variability and Variance Bounds Tests for the Rationality of Stock Prices.” American Economic Review, 76 (06 1986), 483–498.Google Scholar
McDonald, J. B.; McQueen, G. R.; and Thorley, S.. “Testing for Duration Dependence with Discrete Data.” Working Paper, Marriott School of Management, Brigham Young Univ. (06 1992).Google Scholar
McQueen, G. R. “Long-Horizon Mean-Reverting Stock Prices Revisited.” Journal of Financial and Quantitative Analysis, 27 (03 1992), 1–18.CrossRefGoogle Scholar
McQueen, G. R., and Thorley, S.. “Are Stock Returns Predictable? A Test Using Markov Chains.” Journal of Finance, 46 (03 1991), 239–263.CrossRefGoogle Scholar
Merton, R. C. “On the Current State of the Stock Market Rationality Hypothesis.” In Macroeconomics and Finance: Essays in Honor of Franco Modigliani, Dornbush, R., Fisher, S., and Bossons, J., eds. Cambridge, MA: The MIT Press (1987).Google Scholar
Poterba, J., and Summers, L.. “Mean Reversion in Stock Prices: Evidence and Implications.” Journal of Financial Economics, 22 (10 1988), 27–59.CrossRefGoogle Scholar
Richardson, M. “Temporary Components of Stock Prices: A Skeptic's View.” Journal of Business and Economic Statistics, 11 (04 1993), 199–207.CrossRefGoogle Scholar
Santoni, G. J. “The Great Bull Markets 1924–1929 and 1982–1987: Speculative Bubbles or Economic Fundamentals?” Review, Federal Reserve Bank of St. Louis, (11 1987), 16–29.Google Scholar
Shiller, R. J. “Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?” American Economic Review, 71 (06 1981), 421–436.Google Scholar
Shiller, R. S. “Rational Expectations and the Dynamic Structure of Macroeconomic Models: A Critical Review.” Journal of Monetary Economics, 5 (01 1978), 1–44.CrossRefGoogle Scholar
Tauchen, G., and Pitts, M.. “The Price Variability-Volume Relationship on Speculative Markets.” Econometrica, 51 (03 1983), 485–505.CrossRefGoogle Scholar
Tirole, J. “Asset Bubbles and Overlapping Generations.” Econometrica, 53 (11 1985), 1499–1528.CrossRefGoogle Scholar
Tirole, J. “On the Possibility of Speculation under Rational Expectations.” Econometrica, 50 (09 1982), 1163–1181.CrossRefGoogle Scholar
West, K. D. “A Specification Test for Speculative Bubbles.” Quarterly Journal of Economics, 102 (08 1987), 553–580.CrossRefGoogle Scholar
West, K. D. “Bubbles, Fads, and Stock Price Volatility Tests: A Partial Evaluation.” Journal of Finance, 43 (07 1988), 639–656.CrossRefGoogle Scholar
White, E. N. “The Stock Market Boom and Crash of 1929 Revisited.” Journal of Economic Perspectives, 4 (Spring 1990), 67–83.CrossRefGoogle Scholar