ECN 506 Lecture Notes - Lecture 8: Irrational Exuberance, Alan Greenspan, Procyclical And Countercyclical
Document Summary
Some economists think that high price-earnings (p/e) ratios signal bubbles in the stock market. It is a widely popular ratio reported for stocks. Earnings per share (eps): ( net income - dividends. A high p/e ratio usually reflects higher expectations of the company"s future growth potential. A low p/e ratio reflects that there is less potential for rapid growth of the company. High p/e ratios are generally interpreted as evidence of bubbles. Bubbles in the stock market (deviations of stock prices from their underlying fundamentals) can disrupt the course of the economy, through their effect on aggregate demand and supply in the economy. Speculative economic bubbles in the market often appear to be driven by buyers operating on irrational exuberance, who take little notice of underlying fundamental values. Individuals see a stock price rising and are drawn into the market in a bandwagon effect. The rise in the u. s. stock market during the late.
