A1579
Title: Fundamental bubbles in equity markets
Authors: Florian Ielpo - Centre Economie de la Sorbonne (France) [presenting]
Mikita Kniahin - EPFL (Switzerland)
Abstract: Using an affine model to compute the price of equities based on a dataset of macroeconomic factors, we propose a measure of "fundamental bubbles". The joint dynamics of macroeconomic factors and short rates in a VAR model allows for a mutual feedback mechanism between monetary policy and macroeconomic variables. We use a dynamic affine term structure framework to price equity and bonds, and investigate how prices are related to macro variables that span them. We analyse the discrepancies between market and model implied equity prices, the latter approximating "fundamental valuation". By testing the stationarity of the discrepancies, we investigate whether equity prices exhibit a bubble behavior. We perform the analysis over 3 major US and 3 major European equity indices, diagnose bubbles and confirm and its consequences for S\&P500 and Dow Jones over the 1990-2017 period.
