tailieunhanh - TESTING FOR SPECULATIVE BUBBLES IN STOCK PRICES

OCC has developed a procedure known as Exercise By Exception to expedite its processing of exercises of expiring options by certain brokerage firms that are Clearing Members of OCC. Under this procedure, which is sometimes referred to as "ex-by-ex", OCC has established in-the-money thresholds and every contract at or above its in-the- money threshold will be exercised unless OCC's Clearing Member specifically instructs OCC to the contrary. Conversely, a contract under its in-the-money threshold will not be exercised unless OCC's Clearing Member specifically instructs OCC to do so. OCC does have discreton as to which securities are subject to, and may exclude other securities from, the ex-by-ex. | Working Paper 8807 TESTING FOR SPECULATIVE BUBBLES IN STOCK PRICES by As 11 Demi rguc-Kunt and Hashem Dezhbakhsh Asli Demirguc-Kunt is a visiting economist at the Federal Reserve Bank of Cleveland. Hashem Dezhbakhsh is an assistant professor of economics at the University of Akron in Akron Ohio. The authors would like to thank Robert Shiller and John Campbell for providing them with the data and would like to thank Edward Kane Huston McCullough and Alan Stockman for their helpful comments. Working papers of the Federal Reseve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment. The views stated herein are those of the authors and not necessarily those of the Federal Bank of Cleveland or of the Board of Governors of the Federal Reserve System. ABSTRACT A modified version of West s 1987 method for investigating the possibility of speculative bubbles in stock prices is recommended that is computationally simpler and unlike West s method tests the no bubble hypothesis directly. The proposed method is applied to long-term annual . stock-market data. Contrary to West s findings no evidence of speculative bubbles in stock prices during 1871-1981 or 1871-1988 is found. I. INTRODUCTION It is widely believed that fluctuations in the equilibrium price of an asset reflect changes in corresponding market fundamentals. Accordingly stock-market booms depressions and crashes can be explained by changes in stock price fundamentals defined as the expected present value of future dividends. It is possible however that self-fulfilling expectations called speculative bubbles cause a persistent deviation in stock prices from the path consistent with these fundamentals. Since speculative bubbles are argued to have substantial real effects it is of interest to investigate their existence Blanchard and Watson This possibility has been empirically investigated by Flood and Garber Leroy and Porter Shiller and Shiller Diba and Flood and .

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