About the Tech Bubble in the Late 1990s Facts .Pietro Veronesi Some facts about the 1990’s Tech

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Transcript of About the Tech Bubble in the Late 1990s Facts .Pietro Veronesi Some facts about the 1990’s Tech

  • Some Facts About the Tech Bubble in the Late 1990s

    (Some of the Slides from a Recent NBER Discussion )

    Pietro Veronesi

    Graduate School of Business,

    University of Chicago

    CEPR, NBER

    NBER April 2006

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 1

    Some Facts About the Nasdaq Bubble

    A. What went up at the end of the 1990s?

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 1

    Some Facts About the Nasdaq Bubble

    A. What went up at the end of the 1990s?

    1. Nasdaq Index.

    1997 1998 1999 2000 2001 2002 2003 20040

    0.5

    1

    1.5

    2

    2.5

    3

    3.5

    4Cumulative Return: NYSE and NASDAQ

    NYSE

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 2

    Some Facts About the Nasdaq Bubble

    A. What went up at the end of the 1990s?

    1. Nasdaq Index.

    2. Nasdaq Volatility.

    1997 1998 1999 2000 2001 2002 2003 2004

    0.5

    1

    1.5

    2

    2.5

    3

    3.5

    4Nasdaq Volatility

    1997 1998 1999 2000 2001 2002 2003 2004

    0.15

    0.2

    0.25

    0.3

    0.35

    0.4

    0.45

    0.5

    Volatility

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 3

    Some Facts About the Nasdaq Bubble

    A. What went up at the end of the 1990s?

    1. Nasdaq Index.

    2. Nasdaq Volatility.

    3. Nasdaq Beta.

    1997 1998 1999 2000 2001 2002 2003 20040

    2

    4Nasdaq Beta

    1997 1998 1999 2000 2001 2002 2003 20040.75

    1

    1.25

    1.5

    1.75

    2

    Beta

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 4

    The Less Famous NYSE High Tech Bubble

    B. Whatever happened to Nasdaq also happened to NYSE High-Tech Stocks.

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 4

    The Less Famous NYSE High Tech Bubble

    B. Whatever happened to Nasdaq also happened to NYSE High-Tech Stocks.

    NYSE Hi Tech Stocks went up compared to NYSE Lo Tech Stocks

    1997 1998 1999 2000 2001 2002 2003 20040.5

    1

    1.5

    2

    2.5

    3

    3.5

    4Cumulative Return: NYSE High Tech, NYSE Low Tech and NASDAQ

    NYSE High TechNYSE Low TechNasdaq

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 5

    The Less Famous NYSE High Tech Bubble

    B. Whatever happened to Nasdaq also happened to NYSE High-Tech Stocks.

    NYSE Hi Tech Stocks went up compared to NYSE Lo Tech Stocks

    NYSE Hi-Tech Volatility has the same properties of Nasdaq Volatility

    1997 1998 1999 2000 2001 2002 2003 20040.5

    1

    1.5

    2

    2.5

    3NYSE HiTech Volatility

    1997 1998 1999 2000 2001 2002 2003 20040.1

    0.15

    0.2

    0.25

    0.3

    0.35

    Volatility

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 6

    The Less Famous NYSE High Tech Bubble

    B. Whatever happened to Nasdaq also happened to NYSE High-Tech Stocks.

    NYSE Hi Tech Stocks went up compared to NYSE Lo Tech Stocks

    NYSE Hi-Tech Volatility has the same properties of Nasdaq Volatility

    NYSE Hi-Tech Beta has the same properties of Nasdaq Beta.

    1997 1998 1999 2000 2001 2002 2003 20040.5

    1

    1.5

    2

    2.5

    3NYSE HiTech Beta

    1997 1998 1999 2000 2001 2002 2003 20040.5

    1

    1.5

    2

    2.5

    3

    Beta

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 7

    Trading Volume in Tech Stocks

    C. Is it really true that trading volume in tech stocks went up in the late 1990s?

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 7

    Trading Volume in Tech Stocks

    C. Is it really true that trading volume in tech stocks went up in the late 1990s?

    Nasdaq Turnover increased somewhat.

    But it peaked well after the bubble burst.

    1997 1998 1999 2000 2001 2002 2003 20040.5

    1

    1.5

    2

    2.5

    3

    3.5

    4Nasdaq Turnover

    1997 1998 1999 2000 2001 2002 2003 20040.15

    0.2

    0.25

    0.3

    0.35

    0.4

    0.45

    0.5

    Turnover

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 8

    Trading Volume in Tech Stocks

    C. Is it really true that trading volume in tech stocks went up in the late 1990s?

    Nasdaq Turnover increased somewhat.

    But it peaked well after the bubble burst. NYSE Hi Tech Stocks Turnover did not move at all

    1997 1998 1999 2000 2001 2002 2003 20040.5

    1

    1.5

    2

    2.5

    3NYSE Hi Tech Turnover

    1997 1998 1999 2000 2001 2002 2003 20040.08

    0.1

    0.12

    0.14

    0.16

    0.18

    Turnover

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 9

    Trading Volume in Tech Stocks

    C. Is it really true that trading volume in tech stocks went up in the late 1990s?

    Nasdaq Turnover increased somewhat.

    But it peaked well after the bubble burst. NYSE Hi Tech Stocks Turnover did not move at all

    Nasdaq Hi Tech Stocks Turnover went down.

    1997 1998 1999 2000 2001 2002 2003 20040.5

    1

    1.5

    2

    2.5

    3

    3.5

    4

    4.5Nasdaq Hi Tech Turnover

    1997 1998 1999 2000 2001 2002 2003 20040.1

    0.15

    0.2

    0.25

    0.3

    0.35

    0.4

    0.45

    0.5

    Turnover

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 10

    Why Did the Bubble Burst?

    D. There is little doubt of what caused tech stock prices to drop in 2000.

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 10

    Why Did the Bubble Burst?

    D. There is little doubt of what caused tech stock prices to drop in 2000.

    Nasdaqs Profitability plummeted in 2000.Nasdaq and NYSE/Amex M/B ratios

    1960 1965 1970 1975 1980 1985 1990 1995 2000 20050

    1

    2

    3

    4

    5

    6

    7

    M/B

    NYSE/AmexNasdaq

    Nasdaq and NYSE/Amex profitability

    1960 1965 1970 1975 1980 1985 1990 1995 2000 200520

    15

    10

    5

    0

    5

    10

    15

    20

    Return o

    n equity,

    percent

    per yea

    r

    NYSE/AmexNasdaq

    (Source: Pastor and Veronesi Was There a Nasdaq Bubble in the Late 1990s? JFE, 2006)

    fpveroneLine

    fpveroneLine

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 11

    Was it a Bubble?

    It is possible that prices exceeded fundamentals in the late 1990s for tech stocks. However, an explanation based on short sales constraints may find it hard to

    explain why exactly the same pattern of return, volatility and risk occurredin NYSE Hi Tech stocks.

    Short sales constraints are much less binding for NYSE stocks.

    Short sales constraints though may have played a role in Nasdaq The bubble was stronger in Nasdaq

    Trading seemed more active in Nasdaq during the bubble period (but itpeaked later).

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 12

    Was it a Bubble?

    Uncertainty about long term growth and low risk aversion may also have playedan important role.

    (see Pastor and Veronesi Was there a Nasdaq bubble in the late 1990s?, 2006, JFE)

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 12

    Was it a Bubble?

    Uncertainty about long term growth and low risk aversion may also have playedan important role.

    (see Pastor and Veronesi Was there a Nasdaq bubble in the late 1990s?, 2006, JFE)

    This story explains all of the facts discussed earlier.

    1. High uncertainty about long term growth + low risk aversion imply (very)high prices.

    2. High uncertainty implies a high return volatility and a high beta.

    3. High uncertainty implies a strong reaction of prices to bad news in prof-itability (and hence price drop)

    4. High uncertainty + differences of opinion implies a high trading volume.

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 12

    Was it a Bubble?

    Uncertainty about long term growth and low risk aversion may also have playedan important role.

    (see Pastor and Veronesi Was there a Nasdaq bubble in the late 1990s?, 2006, JFE)

    This story explains all of the facts discussed earlier.

    1. High uncertainty about long term growth + low risk aversion imply (very)high prices.

    2. High uncertainty implies a high return volatility and a high beta.

    3. High uncertainty implies a strong reaction of prices to bad news in prof-itability (and hence price drop)

    4. High uncertainty + differences of opinion implies a high trading volume.

    Moreover, it explains other facts about the late 1990s

    1. High uncertainty increases option value of new ventures and thus increaseincentive to go public

    = IPO wave of tech stocks at the end of the 1990s

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 13

    Was it a Bubble?

    Uncertainty and learning also imply one additional reason why prices shoulddecline during a technological revolution.

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 13

    Was it a Bubble?

    Uncertainty and learning also imply one additional reason why prices shoulddecline during a technological revolution.

    Technological Revolutions imply an Increase in Risk

    (See Pastor and Veronesi, Technological Revolutions and Stock Prices, NBER WP 2005)

  • Pietro Veronesi Some facts about the 1990s Tech Bubble page: 13

    Was it a Bubble?

    Uncertainty and learning also imply one additional reason why prices shoulddecline during a technol