Economic stabilization is one of the main government objectives in the economy. One of the most destructive and devastating factors that could damage financial markets, are price bubble formations. Thus, bubble creation in stock markets can be considered as a result of investor behaviors, because the market prices mainly reflect investor expectations from firm’s future perspectives.
The aim of this paper is to study rational bubbles with the consideration of one of the limitations of arbitrage, Noise Trader Risk, by focusing on rational expectations in the Tehran Stock Exchange. To achieve this aim, by using Panel Data and ARDL approaches, from 2000M3 to 2008M10 appropriate models are estimated. Results indicate that during the underlying period, even with dominance of rational arbitrageur; noise traders have a significant impact in the formation of bubbles. The results emphasize the importance of inflation and price-dividend ratio when assessing investment risk.
JEL Classification: E44, G14, G11, E31