A new stock-price bubble with stochastically deflating trajectories

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.

KEYWORDS:

• Present-value model
• Evans bubble
• incompletely bursting bubble
• stock-price volatility
• particle-filter estimation

JEL CLASSIFICATION:

• C1
• G1

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.