Lecture%20Notes%20for%20Oct%2019

Lexuberanceascoinedbyformerfedchairman alangreenspan

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Unformatted text preview: Prices Fundamental Component – the discounted cash flows approach Bubble Component – overpricing If A bubble exists .com boom created zombies – companies with no asset value but a market value Over‐optimism and incorrect information were contributory Causes of Bubble and Crash: 1.) Self‐fulfilling prophecy – thinking stock prices will increase causes many to buy and thus bid up the stock price 2.) Herding – many just follow others Stock bubbles are caused by Irrational Exuberance, as coined by former Fed Chairman Alan Greenspan The housing bubble was credit driven in that loose credit (credit attainable to anyone) enabled overspending and thus overpricing Stocks Efficient Market Hypothesis – investors use all relevant and available information to make decisions Stocks are for long‐term gain, not short‐term The stock market, represented above by the S&P 500 Ind...
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