Author(s): Mario Forni, Luca Gambetti, Marco Lippi, Luca Sala
We introduce imperfect information in stock prices determination. Agents receive a noisy signal about the structural shock driving future dividend variations. Equilibrium stock prices include a transitory 'noise bubble' which can be responsible for boom andbust episodes unrelated to economic fundamentals. We propose a non-standard VAR procedure to estimate impulse response functions to noise shock and the bubble component of stock prices. Noise explains a large fraction of US stock prices. The dot-com bubble is explained by noise. The 2007 stock price boom is not a bubble, whereas the following stock market crisis is due to negative noise shocks.
Keywords: Rational bubbles, structural VARs, noise shocks
JEL codes: C32, E32, E62