Re: Sustainable Stock Prices

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Harry,
     There is a very large literature arguing that how one can
explain why stock prices are so volatile while dividends are
not is due to people varying the discount rates they are using
in carrying out their implicit present value calculations.  However,
survey and other evidence suggests that people do not in fact
vary their subjective discount factors all that much and certainly
not enough to justify such price volatility.  Clearly they are varying
their expectations of future dividends or capital gains.
      I am in a hurry at the moment so will not provide references in
this post, but can do so later if you really want them.  Much of this
discussion is covered in Robert Shiller's _Market Volatility_, 1989,
MIT Press.
Barkley Rosser
-----Original Message-----
From: Harry Veeder <veed0001@xxxxxxxxxxxxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Date: Tuesday, April 11, 2000 11:31 AM
Subject: Re: Sustainable Stock Prices


>
>----------
>>From: paul davidson <pdavidson@xxxxxxx>
>>To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
>>Subject: Re: Sustainable Stock Prices
>>Date: Mon, Apr 10, 2000, 2:14 pm
>>
>
>>At 11:50 AM 4/8/00 , Harry wrote:
>>
>>
>>>John, raises an interesting point. It is interesting because
>>>I think it involves an incorrect assumption about nature of bubbles.
>>>I believe the nature of bubbles reflects "subjective" inflated
>>>estimates of PRESENT VALUE rather than future earnings.
>>
>>
>>But Harry , unless you are using a different language than most
economists,
>>the present value is the discounted (expected) future earnings.
>>
>
>
>This is true, but that does mean the nature of present value is identical
>with the expectation of future earnings. The act of discounting transforms
>expected future earnings into something else known as present value.
>
>In the case of bubbles, expected future earnings would remain relatively
>stable but the discounting operation that traders use in their own minds
>would be unreasonable as to give an inflated estimate of present value.
>If traders always used textbook discount calculations like accountants and
>economists bubbles would never arise.
>
>Bill Gates "feel good smile", does not alter expected
>future earnings but it does cause present value to go up.
>A smart trader in bubble stocks makes money by exploiting the
>giddy teenage mentality of other traders.
>
>Harry Veeder
>
>