Abstract
The acceleration of U.S. productivity growth in late 1990s suggests a significant advance in technological innovations, making the perceived probability of entering a new ever increasing. Based on macroeconomic data, we identify a Bayesian investor's belief evolution when facing a possible structural break in the economy. We show that such a belief evolution plays a significant role in explaining both the stock market boom and the crash during 1998-2001. We conclude that a rational investor's uncertainty about the future of the U.S. economy provides an alternative explanation for the late 1990s' stock market bubble.
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