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Original Articles

A new stock-price bubble with stochastically deflating trajectories

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ABSTRACT

We propose a new, rational stock-price bubble that is able to generate recurringly explosive and stochastically deflating trajectories. Our flexible bubble process entails stock-price volatility dynamics that are consistent with real-world data. To demonstrate this, we fit our bubble specification to NASDAQ data and analyse the volatility dynamics.

JEL CLASSIFICATION:

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 In other words, represents an i.i.d. lognormal process with .

2 Technical details of our estimation procedure are available upon request.

3 We divided the NASDAQ time series by 10, in order to achieve numerical stability of the EM algorithm.

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