Tor Tolhurst, University of California, Davis
Model-Free Detection of a Speculative Asset Bubble: Evidence from the World Market for Superstar Wines
Date and Location
Thursday, October 3, 2019, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101
Social Sciences and Humanities
Abstract
Bubbles occur when an asset price deviates from its fundamental value. Economists have shown asset bubbles are consistent with
neoclassical theory and can arise in a variety of laboratory settings; yet cogent, direct evidence of a bubble in an actual market has remained elusive. The challenge for the empiricist is that fundamental values are necessarily unobservable. I propose a bubble test for one of two nearly identical assets assuming the difference in their fundamental values is a latent exchangeable random variable. Their close relationship implies the difference in fundamentals between the two assets is bounded, bounds which I can find using a concentration inequality. Using this test, I find strong evidence of a bubble in the price of the Bordeaux wine Lafite Rothschild, relative to other fine wines exchanged on global secondary markets. In at least three consecutive periods the upper bound is violated. This is the first direct evidence of a bubble which is both consistent with rational bubble theory and independent of a structural valuation model.
Contact Us
2116 Social Sciences and HumanitiesUniversity of California, Davis
One Shields Avenue
Davis, CA 95616
Main Office: 530-752-1515
Student Advising Services: 530-754-9536
DeLoach Conference Room: 530-752-2916
Main Conference Room: 530-754-1850