Skip to main content Accessibility help
×
Home

A NOTE ON BUBBLES, WORTHLESS ASSETS, AND THE CURIOUS CASE OF GENERAL MOTORS

Published online by Cambridge University Press:  26 June 2013


Tom Ahn
Affiliation:
University of Kentucky
Jeremy Sandford
Affiliation:
University of Kentucky
Paul Shea
Affiliation:
Bates College
Corresponding
E-mail address:

Abstract

Since the company declared bankruptcy in June 2009, shares of General Motors stock (now known as Motors Liquidation Company) have continued to trade at a high volume while maintaining a market capitalization near $300 million through most of 2010. Anecdotal evidence strongly suggests that both rational speculators and uninformed investors (often mistaking Motors Liquidation for the new, reorganized GM) have purchased the stock. We develop a theoretical asset-pricing model that includes both types of agents. We present two major results. First, the most frequent state is one where a small fraction of rational agents ensure that the share price behaves as if all agents are rational. A second state exists where all rational agents exit and the share price is inflated. Second, fitting the model to Motors Liquidation, we find evidence of irrational asset pricing for this firm. We find little evidence of similar behavior in the share prices of the thirty stocks that compose the Dow Jones Industrial Average.


Type
Note
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below.

References

Bidarkota, P. (2006) On the economic impact of modeling nonlinearities: The asset pricing example. Macroeconomic Dynamics 10, 5676.CrossRefGoogle Scholar
Branch, B. and Evans, G. (2010) Asset return dynamics and learning. Review of Financial Studies 23 (4), 16511680.CrossRefGoogle Scholar
Brock, W. and Hommes, C. (1998) Heterogeneous beliefs and routes to chaos in a simple asset pricing model. Journal of Economic Dynamics and Control 22, 12351274.CrossRefGoogle Scholar
Chakraborty, A. and Evans, G. (2008) Can perpetual learning explain the forward premium puzzle? Journal of Monetary Economics 55, 477490.CrossRefGoogle Scholar
DeLong, J.B., Shleifer, A., Summers, L., and Waldmann, R. (1990) Noise trader risk in financial markets, Journal of Political Economy 98 (4), 703738.CrossRefGoogle Scholar
Evans, G. and McGough, B. (2005) Stable solutions in models with predetermined variables. Journal of Economic Dynamics and Control 29, 601625.CrossRefGoogle Scholar
Evans, G. and McGough, B. (2011) Representations and sunspot stability. Macroeconomic Dynamics 15, 8092.CrossRefGoogle Scholar
Granato, J., Guse, E., and Wong, S. (2008) Learning from the expectations of others. Macroeconomic Dynamics 12, 345377.CrossRefGoogle Scholar
Gurshun, N. and Harrison, S. (2008) Asset pricing in dynamic stochastic general equilibrium models with indeterminacy. Macroeconomic Dynamics 12, 5071.Google Scholar
Hirshleifer, D. (2001) Investor psychology and asset pricing. Journal of Finance 56 (4), 15331597.CrossRefGoogle Scholar
Olsen, R. (1998) Behavioral finance and its implications for stock-price volatility. Financial Analysts Journal 54 (2), 1826.CrossRefGoogle Scholar
Santos, M. and Woodford, M. (1997) Rational asset pricing bubbles. Econometrica 65 (1), 1957.CrossRefGoogle Scholar
Shiller, R. (2002) Bubbles, human judgment, and expert opinion. Financial Analysts Journal 58 (3), 1826.CrossRefGoogle Scholar
Timmermann, A.G. (1993) How learning in financial markets generates excess volatility and predictability in stock prices. Quarterly Journal of Economics 108, 11351145.CrossRefGoogle Scholar
Timmermann, A.G. (1996) Excessive volatility and predictability of stock prices in autoregressive dividend models with learning. Review of Economic Studies 63, 523557.CrossRefGoogle Scholar

Usage data cannot currently be displayed.

Hostname: page-component-57c975d4c7-7scbf Total loading time: 0.297 Render date: 2020-11-24T01:47:38.052Z Query parameters: { "hasAccess": "0", "openAccess": "0", "isLogged": "0", "lang": "en" } Feature Flags last update: Tue Nov 24 2020 00:52:49 GMT+0000 (Coordinated Universal Time) Feature Flags: { "metrics": false, "peerReview": true, "crossMark": true, "comments": false, "relatedCommentaries": false, "subject": true, "clr": false, "languageSwitch": false }

Send article to Kindle

To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

A NOTE ON BUBBLES, WORTHLESS ASSETS, AND THE CURIOUS CASE OF GENERAL MOTORS
Available formats
×

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

A NOTE ON BUBBLES, WORTHLESS ASSETS, AND THE CURIOUS CASE OF GENERAL MOTORS
Available formats
×

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

A NOTE ON BUBBLES, WORTHLESS ASSETS, AND THE CURIOUS CASE OF GENERAL MOTORS
Available formats
×
×

Reply to: Submit a response


Your details


Conflicting interests

Do you have any conflicting interests? *