Noise bubbles

We introduce imperfect information in stock price determination. Agents, who are not necessarily rational, receive a noisy signal about the structural shock driving future dividend variations. Equilibrium stock prices are decomposed into a fundamental component and a transitory "noise bubble" which may be responsible for boom and bust episodes, unrelated to economic fundamentals. We propose a non-standard VAR procedure to estimate the effects of noise shocks as well as bubble episodes. Noise explains a large fraction of US stock prices. The dot-com bubble is almost entirely explained by noise. The 2007 stock price boom is not a bubble, whereas the following stock market crisis is triggered by a negative noise shock