On Testing for Speculative Bubbles (original) (raw)
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This thesis is a collection of three empirical papers that tests hypotheses within the context of two related and intersecting theoretical frameworks: rational expectations and efficient markets. The aim is to empirically explore to what extent households form their inflation expectations in a rational manner, and to explain why households' perceptions may deviate from the measured official rate. This is done by studying how their expectations change with economic conditions and with information about their readiness to spend money on cars and houses. The thesis also addresses the effects of option introduction on the prices and risk of the underlying securities, where this information implicitly tests stock market efficiency. Chapter 1 provides an overview of different concepts of expectations and describes the link between the hypotheses of rational expectations and efficient markets. The chapter also presents some stylised facts about the main dataset used to explore households' opinions about past and future inflation rates, and it provides a summary of each following chapter. Chapter 2 explores to what extent households' inflation expectations are consistent with theories of rationality, and how these expectations change in times of major economic events and changes in the inflation environment. The events studied are the financial and economic crisis of 2008, several euro-cash changeovers, and periods of low and high inflation. The results show that households do not form rational expectations in the sense of Muth (1961). Chapter 3 investigates whether households' purchasing plans for big expenditure items matter to households when they form their views on past and future inflation, and whether differences in their purchasing plans can explain the deviations usually found between surveyed inflation and the official measure of the rate of inflation. The results show that stronger incentives to collect information on inflation induce households to produce perceived and expected inflation rates that more closely correspond to the officially measured rate of inflation. Chapter 4 investigates the effects of option introduction on the prices and risk of the underlying securities. The results show that the introduction of options provide the underlying stocks with a significant price increase, and a persistent excess return compared to an index indicating normal return. The impact on the total risk is also favourable, while no influence on the systematic risk could be verified. Volatility in the underlying stocks decrease continuously for ten months after the introduction of the option program.
Are Supply and Demand Driving Stock Prices
This paper attempts to shed new light on price pressure in the stock market. I first define a rigorous measure of order flow imbalance using limit order data. It turns out that this imbalance is highly correlated with stock returns, with R 2 around 50% for the average stock. This price impact of orders does not appear to be reversed later. In fact, the correlation between order flow and return is observed for micro time intervals of ten minutes all the way to macro time intervals of three months. I then attempt to distinguish between private information and uninformed price pressure by looking at the implications of a private information model. For idiosyncratic returns, where one would expect private information to be important, and the R 2 to be high, the R 2 is indeed around 41%. However, for the common market return, where one would expect private information to be minor, the R 2 is even higher at 70%. The high R 2 on the market suggests that private information does not explain well the observed co-movement of orders and prices. This points toward a bigger role for uninformed price pressure than is usually assumed, which, for example, could lead to the formation of stock market bubbles. * I would like to thank