Abstract
The present value model is a popular and reasonable model used to assessing the stock price in accordance with the rational expectations. In fact, that we see that stocks overvalued may become more overvalued. We argue that investor has another aspect when valuing a stock price. Furthermore, we believe it is called bubble. The specification of stock price included bubble satisfied the Euler Equation. Thus, it is called rational bubble.This study employs co-integration between stock price and dividend as present-value model in the equilibrium relationship. This study used Indonesian quarterly data in period of 1999-2008. By Engle-Granger and Johansen co-integration tests we find that stock price and dividend are not co-integrated, in favor of the evidence of rational bubble in Indonesian stock market. The result gives us some explanation that the fundamental approach is not sufficient to describe all stock price movements. Thus, one may revisited his investment decisions beyond the fundamentals.
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