Re: Sustainable Stock Prices

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

Harry,
     Still too busy, indeed more so, but could not find
the discount survey on a quick scan of my shelf.  Did
however find a source on surveys of time-varying risk
premia in forex markets which are frequently cited in a
similar vein to explain volatility of forex markets.  One
would expect them to vary more than subjective discount
rates, offhand.  They don't vary much.  Reference is

Froot, Kenneth A. and Jeffrey A. Frankel, 1989, "Forward
Discount Bias: Is It an Exchange Risk Premium?" Quarterly
Journal of Economics, 104, 139-161.

      BTW, bubbles are the obvious alternative explanation for
stock price volatility besides extreme variations in "news" (hard
to believe) and extreme variations in discount rates.  Certainly
the actual fluctuations of dividends do not justify it, as Shiller
has shown in _Market Volatility_.
Barkley Rosser
-----Original Message-----
From: Harry Veeder <veed0001@xxxxxxxxxxxxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Date: Tuesday, April 11, 2000 10:57 PM
Subject: Re: Sustainable Stock Prices


>
>----------
>>From: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>
>>To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
>>Subject: Re: Sustainable Stock Prices
>>Date: Tue, Apr 11, 2000, 4:55 pm
>>
>
>>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 not trying explain *volatility*. I am trying to make sense
>of *bubbles* or the emergence of consistently overvalued stocks
>like the case of the Dutch tulip.
>
>>From what I can gather bubbles are to economics like ball lightening
>is to physics. Some economists regard the notion of overvaluation as
>uneconomic or subjective fancy, some economists treat it as real
>but don't really have a satisfactory explanation of how it arises,
>persists and bursts. In other words bubbles are on the
>fringes of economic theory.
>
>(Personal anecdote: My mother and grandfather have both seen ball
>lightening. My grandfather saw a ball of light fly down his stairs
>and out his front door. My mother saw it in her kitchen in '63 or
>'64 during a thunder storm. It appeared by an outlet on the counter,
>a ball of white light roughly the size of an orange. It drifted a little,
>and then disappeared after several seconds. At the same moment it
>disappeared the vacuum tubes in the kitchen radio popped.)
>
>
>>      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
>
>Yes I would like to see them. The discussion on discounting would still
>be interesting.
>
>Harry Veeder
>
>