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Bubble, Bubble, Toil and Trouble: Asset Prices and Market Speculation

ENDNOTES

  1. Much of this research is focused on the possible causes of stock and real estate market crashes. The volume edited by Eugene White (1996) contains an excellent collection of articles on this issue.
  2. Because most people would rather receive a dollar today than tomorrow, tomorrow's dollar is not worth as much to them today. In fact, rather than wait for the dollar tomorrow, they might be willing to accept instead, say, 90 cents today. The 90 cents is known as the current (or discounted) value of tomorrow's dollar; the 10 percent given up is known as the discount rate.
  3. There is another branch of the literature that argues these crashes and other supposed bubbles were not bubbles at all, but simply the result of investors' rational reactions to news about changes in market fundamentals at the time. The volume edited by Robert Flood and Peter Garber contains several articles supporting this view.
  4. Shareholders, though, clearly have very high expectations for the firms' profit prospects.
  5. See Weller (1992) for a more detailed (and technical) explanation of rational bubbles.
  6. The articles by Rappoport and White can be found in White's edited volume.

REFERENCES

Flood, Robert P., and Peter M. Garber, eds. Speculative Bubbles, Speculative Attacks, and Policy Switching (Cambridge, Mass: The MIT Press, 1994).

Greenspan, Alan. "Question: Is There a New Economy?" remarks at the University of California, Berkeley (September 4, 1998).

__________. "The Challenge of Central Banking in a Democratic Society," remarks at the American Enterprise Institute for Public Policy Research, Washington, D.C. (December 5, 1996).

Holstein, William J., and Jack Egan. "Pop?" U.S. News and World Report (January 25, 1999), pp. 42-8.

LeRoy, Stephen F., and Christian Gilles. "Asset Price Bubbles," entry in New Palgrave Dictionary of Money and Finance (1992), pp. 74-6.

Romer, David. "Rational Asset-Price Movements Without News," American Economic Review (December 1993), pp. 1112-30.

Shiller, Robert J. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?" American Economic Review (June 1981), pp. 421-36.

__________. "Speculative Prices and Popular Models," Journal of Economic Perspectives (Spring 1990), pp. 55-65.

Shleifer, Andrei, and Lawrence H. Summers. "The Noise Trader Approach to Finance," Journal of Economic Perspectives (Spring 1990), pp. 19-33.

Stiglitz, Joseph E. "Symposium on Bubbles," Journal of Economic Perspectives (Spring 1990), pp. 13-18.

"The Unbearable Lightness of Finance," The Economist (December 5, 1998), pp. 83-4.

Weller, Paul A. "Rational Bubbles," entry in New Palgrave Dictionary of Money and Finance (1992), pp. 271-73.

White, Eugene N., ed. Stock Market Crashes and Speculative Manias. The International Library of Macroeconomic and Financial History, no. 13 (Brookfield, Vt: Edward Elgar Publishing, 1996).