TY  - JOUR
AU  - Flood,Robert P.
AU  - Hodrick,Robert J.
TI  - Asset Price Volatility, Bubbles, and Process Switching
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1867
PY  - 1987
Y2  - February 1987
UR  - http://www.nber.org/papers/w1867
L1  - http://www.nber.org/papers/w1867.pdf
N1  - Author contact info:
Robert Flood
Notre Dame
E-Mail: rflood1@nd.edu

Robert J. Hodrick
Graduate School of Business
Columbia University
3022 Broadway
New York, NY 10027
Tel: 212/854-3413
Fax: 212/316-9219
E-Mail: rh169@columbia.edu
AB  - Evidence of excess volatilities of asset prices compared with those of market fundamentals is often attributed to speculative bubbles. This study examines the sense in which speculative bubbles could in theory lead to excess volatility, hut it demonstrates that some of the variance hounds evidence reported to date precludes bubbles as a reason why asset prices might violate such hounds. The findings must represent some other model misspecffication or market inefficiency. One important misspecification occurs when there searcher incorrectly specifies the time series properties of market fundamentals. A bubble-free example economy characterized by a potential switch in government policies produces paths of asset prices that would appear, to an unwary researcher, to contain bubbles.
ER  -