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Rational speculative bubbles: an empirical investigation of the London Stock Exchange

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Brooks, C. and Katsaris, A. (2003) Rational speculative bubbles: an empirical investigation of the London Stock Exchange. Bulletin of Economic Research, 55 (4). pp. 319-346. ISSN 1467-8586

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To link to this article DOI: 10.1111/1467-8586.00179

Abstract/Summary

In recent years, a sharp divergence of London Stock Exchange equity prices from dividends has been noted. In this paper, we examine whether this divergence can be explained by reference to the existence of a speculative bubble. Three different empirical methodologies are used: variance bounds tests, bubble specification tests, and cointegration tests based on both ex post and ex ante data. We find that, stock prices diverged significantly from their fundamental values during the late 1990's, and that this divergence has all the characteristics of a bubble.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:21314
Uncontrolled Keywords:Stock market bubbles;fundamental values;dividends;variance bounds;cointegration;bubble specification tests
Publisher:Blackwell Publishing

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