Noise bubbles
Forni, Mario (Università degli studi di Modena e Reggio Emilia)
Lippi, Marco (Università di Roma)
Gambetti, Luca (Universitat Autònoma de Barcelona)
Sala, Luca (Università commerciale Luigi Bocconi)

Date:	2017
Abstract:	We introduce noisy information in the determination of stock prices. Agents receive a noisy signal about the structural shock driving future dividend variations. The resulting equilibrium stock price includes a transitory component { the \noise bubble" { which can be responsible for boom and bust episodes unrelated to economic fundamentals. We propose a non-standard VAR procedure to estimate the structural shock and the \noise" shock, their impulse response functions and the bubble component of stock prices. We apply such procedure to US data and _nd that noise explains a large fraction of stock price volatility. In particular the dot-com bubble is entirely explained by noise. On the contrary the stock price boom peaking in 2007 is not a bubble, whereas the following stock market crisis is largely due to negative noise shocks.
Grants:	Ministerio de Economía y Competitividad ECO2012-32392 Ministerio de Ciencia e Innovación SEV-2011-0075
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Language:	Anglès
Document:	Article ; recerca ; Versió acceptada per publicar
Subject:	Rational bubbles ; Structural VARs ; Noise shocks
Published in:	Economic journal, Vol. 127 Núm. 604 (2017) , p. 1940-1976, ISSN 1468-0297

DOI: 10.1111/ecoj.12386

Postprint 40 p, 680.5 KB

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