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  3. Journal of Economic Literature
  4. September 2004
  5. Rational Exuberance

Journal of Economic Literature

ISSN 0022-0515 (Print) | ISSN 2328-8175 (Online)

Rational Exuberance

  • Stephen F. Le Roy
Journal of Economic Literature
vol. 42, no. 3, September 2004
(pp. 783–804)
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Abstract

This article reviews the theory of speculative bubbles. Bubbles are a promising candidate as an explanation for the stock price run-up and collapse of the 1990s in the United States. The theory considers both irrational and rational bubbles, with emphasis on the latter. Rational bubbles, defined as the excess of security or portfolio prices over present values, can occur under conditions that are well understood. One argument relies on the assumed Pareto-optimality of equilibrium that rules out rational bubbles, but it is suggested that this argument is implausible.

Citation

Le Roy, Stephen, F. 2004. "Rational Exuberance." Journal of Economic Literature, 42 (3): 783–804. DOI: 10.1257/0022051042177711

JEL Classification

  • D01 Microeconomic Behavior: Underlying Principles
  • D84 Expectations; Speculations
  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 Information and Market Efficiency; Event Studies; Insider Trading