IDEAS home Printed from https://ideas.repec.org/p/kgu/wpaper/278.html
   My bibliography  Save this paper

Bubbly fundamentals

Author

Listed:
  • Takeo Hori

    (Department of Industrial Engineering and Economics, School of Engineering, Institute of Science Tokyo)

  • Ryonghun Im

    (School of Economics, Kwansei Gakuin University)

  • Hiroshi Nakaota

    (Faculty of Economics, Osaka University of Economics)

Abstract

Increases in the price-to-dividend (P/D) ratio have been observed during bubble periods. Under rational bubble theory, bubbles are characterized by the divergence of the P/D ratio to infinity. However, in the 2010s, asset prices surged to bubble-era levels with no corresponding rise in the P/D ratio. Based on this observation, we construct a macroeconomic model in which asset prices can be high or low under a constant P/D ratio. The endogenous credit constraints yield multiple equilibria with high and low asset prices. In both equilibria, asset prices were determined entirely by the sum of the expected future dividends and influence macroeconomic performance. Our non-bubble model reproduces most of the theoretical results from rational bubble models, highlighting the difficulty of detecting asset bubbles solely from asset prices, even within theoretical frameworks, and underscoring the need for models that facilitate a straightforward calculation of the P/D ratio or fundamental value of assets.

Suggested Citation

  • Takeo Hori & Ryonghun Im & Hiroshi Nakaota, 2024. "Bubbly fundamentals," Discussion Paper Series 278, School of Economics, Kwansei Gakuin University, revised Mar 2025.
    • Handle: RePEc:kgu:wpaper:278
    as

    Download full text from publisher

    File URL: http://192.218.163.163/RePEc/pdf/kgdp278.pdf
    File Function: Revised version, 2025
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    asset bubbles; fundamental value; credit constraints; self-fulfilling expectation; multiple equilibria;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kgu:wpaper:278. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Toshihiro Okada (email available below). General contact details of provider: https://edirc.repec.org/data/dekgujp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.