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INTRINSIC BUBBLES AND FAT TAILS IN STOCK PRICES: A NOTE

Published online by Cambridge University Press:  20 March 2007

PRASAD V. BIDARKOTA  and
BRICE V. DUPOYET
PRASAD V. BIDARKOTA
Affiliation:
Florida International University
BRICE V. DUPOYET
Affiliation:
Florida International University
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Abstract

We study the constant discount rate present value model for stock pricing in a stochastic setting where the exogenous dividend stream is modeled as a random walk with innovations drawn from the family of stable distributions. We derive an exact analytical solution for the fundamental stock price. We evaluate the ability of the model fundamentals and the dividends-driven intrinsic bubbles to explain the observed variation in annual U.S. stock prices. We compare results obtained in this setting with those from the traditional model where all stochastic processes are driven by Gaussian shocks.

Keywords

Stock PricesPresent-Value ModelIntrinsic BubblesFat TailsNormal DistributionsStable Distributions
Type
NOTES
Information
Macroeconomic Dynamics , Volume 11 , Issue 3 , June 2007 , pp. 405 - 422
Copyright
© 2007 Cambridge University Press

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