DP4485 Was There A Nasdaq Bubble in the Late 1990s?

Author(s): Lubo? Pástor, Pietro Veronesi
Publication Date: July 2004
Keyword(s): bubble, uncertainty, valuation
JEL(s): G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4485

Not necessarily. The fundamental value of a firm increases with uncertainty about average future profitability, and this uncertainty was unusually high in the late 1990s. We calibrate a stock valuation model that includes this uncertainty, and show that the uncertainty needed to match the observed Nasdaq valuations at their peak is high but plausible. The high uncertainty might also explain the unusually high return volatility of Nasdaq stocks in the late 1990s. Uncertainty has the biggest effect on stock prices when the equity premium is low.