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Rational Speculative Bubbles: An Empirical Investigation of the London Stock Exchange

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  • Chris Brooks
  • Apostolos Katsaris

Abstract

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.

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  • Chris Brooks & Apostolos Katsaris, 2003. "Rational Speculative Bubbles: An Empirical Investigation of the London Stock Exchange," Bulletin of Economic Research, Wiley Blackwell, vol. 55(4), pages 319-346, October.
    • Handle: RePEc:bla:buecrs:v:55:y:2003:i:4:p:319-346
    DOI: 10.1111/1467-8586.00179
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