A Bayesian's 'Bubble'

63 Pages Posted: 23 Aug 2007 Last revised: 12 Jan 2009

See all articles by C. Wei Li

C. Wei Li

University of Iowa

Hui Frank Xue

Kansas State University (Deceased)

Date Written: September 1, 2008

Abstract

The acceleration of U.S. productivity growth in late 1990s suggests a significant advance in technological innovations, making the perceived probability of entering a "new economy" ever increasing. Based on macroeconomic data, we identify a Bayesian investor's belief evolution when facing a possible structural break in the economy. We show that such a belief evolution plays a significant role in explaining both the stock market boom and the crash during 1998-2001. We conclude that a rational investor's uncertainty about the future of the U.S. economy provides an alternative explanation for the late 1990s' stock market "bubble".

Keywords: Bubble, total factor productivity, Bayesian update, technological innovations

JEL Classification: G12

Suggested Citation

Li, C. Wei and Xue, Hui Frank, A Bayesian's 'Bubble' (September 1, 2008). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1008294 or http://dx.doi.org/10.2139/ssrn.1008294

C. Wei Li (Contact Author)

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business
Iowa City, IA 52242-1097
United States
319-335-0911 (Phone)
3193353690 (Fax)

Hui Frank Xue

Kansas State University (Deceased)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
351
Abstract Views
1,956
Rank
156,345
PlumX Metrics