Re: Evidence Against the Market Bubble Story

From: Robin Hanson (
Date: Wed Jun 14 2000 - 12:56:13 MDT

Hal Finney wrote:
> > "Why Does the Stock Market Fluctuate?"
> >
>I couldn't access this, but I found a 1990 essay on his web site at
> ...
>However upon closer study, I noticed some things which made me more
>skeptical. His model often lags the actual stock price movements.
>This is especially noticeable in the 1929 crash. ...
>But actually you can argue that the drop in dividends in 1930 and
>onward was caused in part by the stock market crash. ...
>It seems, therefore, that the stock market crash led to dividend
>reductions, which then caused his model to predict a stock market crash.
>But that's not a good prediction because the causative condition only
>occured after the supposed effect.

The paper I cited (which I just emailed to you) has some statistical
tests that should not have this problem.

Another interpretation of the lag is that stocks embody information
about future dividends that are not embodied in this history of
past dividends.

>Also, whenever I read these kinds of papers I want to see whether the
>analysis works when extrapolated forward. ...
>I doubt that it would predict the degree of increase the market
>has actually seen, with P/E ratios much higher than historical averages.

My doubt isn't as strong as yours, but yes it would be interested to see.

Robin Hanson
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030
703-993-2326 FAX: 703-993-2323

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