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A NOTE ON BUBBLES, WORTHLESS ASSETS, AND THE CURIOUS CASE OF GENERAL MOTORS

Published online by Cambridge University Press:  26 June 2013

Tom Ahn
Affiliation:
University of Kentucky
Jeremy Sandford
Affiliation:
University of Kentucky
Paul Shea*
Affiliation:
Bates College
*
Address correspondence to: Paul Shea, Bates College, 271 Pettengill Hall, Leviston, ME 04240, USA; e-mail: pshea@bates.edu.

Abstract

Since the company declared bankruptcy in June 2009, shares of General Motors stock (now known as Motors Liquidation Company) have continued to trade at a high volume while maintaining a market capitalization near $300 million through most of 2010. Anecdotal evidence strongly suggests that both rational speculators and uninformed investors (often mistaking Motors Liquidation for the new, reorganized GM) have purchased the stock. We develop a theoretical asset-pricing model that includes both types of agents. We present two major results. First, the most frequent state is one where a small fraction of rational agents ensure that the share price behaves as if all agents are rational. A second state exists where all rational agents exit and the share price is inflated. Second, fitting the model to Motors Liquidation, we find evidence of irrational asset pricing for this firm. We find little evidence of similar behavior in the share prices of the thirty stocks that compose the Dow Jones Industrial Average.

Type
Note
Copyright
Copyright © Cambridge University Press 2013 

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