Stocks as Money: Convenience Yield and the Tech-Stock Bubble
What caused the rise and fall of tech stocks? I argue that a mechanism much like the transactions demand for money drove many stock prices above the 'fundamental value' they would have had in a frictionless market. I start with the Palm/3Com microcosm and then look at tech stocks in general. High prices are associated with high volume, high volatility, low supply of shares, wide dispersion of opinion, and restrictions on long-term short selling. I review competing theories, and only the convenience yield view makes all these connections.
Hunter, William C., George G. Kaufman, and Michael Pomerleano (eds.) Asset price bubbles: The implications for monetary, regulatory, and international policies. Cambridge and London: MIT Press, 2003.
John H. Cochrane, 2005. "Money as stock," Journal of Monetary Economics, vol 52(3), pages 501-528.