Information transmission and adjustment process during the technology bubble

It is widely accepted that speculative bubbles lead to prolonged deviations in the securities prices from their intrinsic values. Stock mispricing due to such deviations may not only lead to adverse wealth effects for the investors but also towards overall economic stability of the economy. However, it is not clear whether the level and magnitude of mispricing varies across economies for a particular economic event. The Technology bubble formation during the late Nineties, and its subsequent deflation during the early Twenties, provides an opportunity to examine the information transmission, adjustment and the extent of mispricing across different economies. This paper addresses these issues using Variance Decomposition and, Impulse Response methodology provided by Sims (1980) and Corrected Damodaran (1993) methodology. We find differences in price adjustment process in the two markets; for instance, we find that it takes a longer period for information adjustment in the Indian Technology equity market compared with US Technology equities. Also, Indian stocks on average overreact to information arrival where as US stocks on average underreact to information arrival. Interestingly, we find that the US and the Indian technology markets were not cointegrated over the observations period and that the US market led the Indian market in the price discovery process in all periods except during the bubble formation period. Finally, this paper reports specific aspects of firm characteristics-based portfolios in both markets. Overall we find that the US market has a faster recovery mechanism than the Indian market.Akbar Z. Al