An Alternative Approach in Evaluating Rational Speculative Bubbles in Stock Exchange

Abstract

The forming of explosive bubbles in stock prices is one of the destructive and devastating factors in capital market. Considering the strategic importance of economic and financial these markets, one of the important issues in economics and financial management literature, to diagnosis and to assessment of the existence of price bubbles in the stock markets.  Various techniques have been used in assessing the existence of bubbles, but the duration dependence test in comparison with other methods, from academics and researchers have gained greater acceptance. It should be noted that confidence to the results of duration dependence tests, it depends on the quality and accuracy of inputs. Excess positive and negative returns are the inputs of duration dependence tests.  So selecting the appropriate method for determining the excess returns is of major importance. This article is intended to describe an alternative approach to determine the excess positive and negative returns, based on the concepts of market efficiency (EMH) and its assumptions, and also the relation between the efficient market hypothesis and capital asset pricing model (CAPM).

Keywords: Efficient market hypothesis (EMH), Capital asset pricing model (CAPM), rational speculative bubbles, Duration dependence test, Stock exchange.