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Why the Bubble Burst

US Stock Market Performance since 1982 Lawrance L. Evans Jr., Economist, Applied Research and Methods Group, US General Accounting Office
Why the Bubble Burst provides a comprehensive look at the most dramatic run-up in equity values in US history. Lawrance Evans takes the reader from theory to empirics, illustrating why we need to go beyond the efficient markets hypothesis and the theory of domestic irrational exuberance to fully unpack the unprecedented phenomenon, why the market was destined for a major decline and why the fallout will be severe and protracted.
Extent: 256 pp
Hardback Price: $135.00 Web: $121.50
Publication Date: 2003
ISBN: 978 1 84376 075 7
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  • Economics and Finance
  • Economic History
  • Financial Economics and Regulation
Why the Bubble Burst provides a comprehensive look at the most dramatic run-up in equity values in US history. Lawrance Evans takes the reader from theory to empirics, illustrating why we need to go beyond the efficient markets hypothesis and the theory of domestic irrational exuberance to fully unpack the unprecedented phenomenon, why the market was destined for a major decline and why the fallout will be severe and protracted.

Quantitative evidence suggests that mutual funds, international portfolio flows, and the decline in the amount of corporate equity outstanding all played an integral role in the stock market boom. These ingredients in the context of a supply and demand based theory of equity price determination indicate that supply and demand forces unrelated to corporate profitability elevated US equity valuations to unsustainable levels.

The author’s conclusions carry implications for economic theory and policy, retirement security and stock market investments in general. Economists, finance professionals and policymakers will find this volume a unique investigation into the stock market boom and bust.
‘Why the Bubble Burst is a most welcome contribution to our understanding of the causes of the stock market boom and bust during the 1980s to 2000. By providing an excellent empirical investigation and analysis of the stock market boom, Evans gives us a coherent critique of how financial markets work and how they set asset prices during times of speculation. His evidence suggests that to understand the recent speculative nature of the stock market we need to go beyond the existing asset pricing models, that are used widely in finance theory today, and look carefully at alternative theories. Turning to the work of Keynes, Minsky, Galbraith and others, the author develops a more general theory of what determines asset price movements in the stock market. A very impressive and valuable work.’
– Richard Holt, Southern Oregon University, US

‘Lawrance Evans’s Why the Bubble Burst will stand as one of the most incisive and important accounts of the stock market’s performance over the last two decades. Offering a broad and coherent evaluation of the major explanations for movements in equity prices, it also provides a remarkably rich empirical analysis that reveals the insufficiencies of these theoretical approaches and affirms the central role of supply and demand in fueling the boom in stocks. Practitioners as well as academics will find information about changes in institutions and portfolios that is both fascinating and supportive of the discussions of market developments.’
– Jane D’Arista, Financial Markets Center, Philomont, US

‘Lawrance Evans combines lucidity, quantitative rigor, and theoretical originality to explain one of the most pressing and contentious economic questions of our time. Why the Bubble Burst could not be more timely.’
– Robert Pollin, University of Massachusetts, Amherst, US
Contents: 1. Towards an Understanding of the Stock Market Bubble 2. Competing Theories of Stock Price Behavior 3. Empirical Approaches to Stock Values 4. Theoretical Approaches to the Stock Market Boom 5. Empirical Analysis I: The Stylized Facts 6. Empirical Analysis II: Formal Econometrics 7. Boom, Bubble and Burst Bibliography Index