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.
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.