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  4. Spring 1990
  5. On Testing for Speculative Bubbles

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

On Testing for Speculative Bubbles

  • Robert P. Flood
  • Robert J. Hodrick
Journal of Economic Perspectives
vol. 4, no. 2, Spring 1990
(pp. 85–101)
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Abstract

The possibility that movements in prices could be due to the self-fulfilling prophecies of market participants has long intrigued observers of free markets. This paper surveys the current state of the empirically-oriented literature concerning rational dynamic indeterminacies, by which we mean a situation of self-fulfilling prophecy within a rational expectations model. Empirical work in this area concentrates primarily on indeterminacies in price levels, exchange rates, and equity prices. We first examine a particular type of explosive indeterminacy, usually called a rational bubble, in an example of the market for equities. Then, we consider empirical work relating to price-level and exchange-rate indeterminacies and empirical studies of indeterminacies in stock prices. Finally, we take up some interpretive issues.

Citation

Flood, Robert P., and Robert J. Hodrick. 1990. "On Testing for Speculative Bubbles." Journal of Economic Perspectives, 4 (2): 85–101. DOI: 10.1257/jep.4.2.85

JEL Classification

  • 313 Capital Markets: Theory, Including Portfolio Selection, and Empirical Studies Illustrating Theory
  • 431 Exchange Rates and Markets--Theory and Studies
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