Re: Evidence Against the Market Bubble Story

From: Robin Hanson (
Date: Mon Jun 19 2000 - 07:47:27 MDT

On 6/15/2000 Hal Finney wrote:
> > >However upon closer study, I noticed some things which made me more
> > >skeptical. His model often lags the actual stock price movements.
> >
> > The paper I cited (which I just emailed to you) has some statistical
> > tests that should not have this problem.
>Thanks, I also found the paper online at
> Again the authors
>are able to show that much of the variability in stock prices over the
>longer term (10-20 years) is captured by this model.
>However I feel that my complaint is still valid, that the model could
>be fundamentally wrong and still show correlation to actual prices,
>by implicitly and subtly including real prices in the calculation.
>Real prices affect dividend levels, and so a model which sets warranted
>prices based on dividends may be expected to correlate with real prices,
>after some time lag. Since real prices correlate with themselves over
>the short term the result is that this kind of model can show correlation
>even though it has no actual predictive value.

The paper is taking an average of dividends over the previous forty years.
So short term fluctuations shouldn't contribute much to the estimate.

I had a brief exchange with the author last week, and he admitted that the
big weakness of the paper is that they model dividends as changeable but
interest rates as fixed. See footnote seven regarding what can happen
when the interest rates are allowed to vary.

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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