Is There Irrational Exuberance?

Abstract

This paper presents a framework in which we can examine whether stock prices are overvalued or undervalued. This paper estimates equilibrium stock prices based on the Lucas (1978) tree model using the Hansen and Sargent (1980) cross-equation restriction approach and the VAR approach. By comparing equilibrium stock prices with actual stock prices, we can judge whether stock prices are overvalued or undervalued. This paper finds that Korean stock prices for the period 1983:1 to 2002:3 were valued substantially more than their equilibrium prices while US stock prices for the period 1871:1 to 2001:9 were on average valued substantially less than their equilibrium prices.