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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
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    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

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