Do Thai stock prices deviate from fundamental values?

The stock market in Thailand experienced several apparent boom and bust cycles in recent years, which raises the question of whether equity prices in Thailand reflect their fundamental values. This paper examines whether the Thai equity market was characterized by rational expectations bubbles over the sample period from June 1975 to June 2006. The cointegration test provides evidence of no long-run relationship among prices, dividends and earnings, indicating the presence of a rational bubble. The results are confirmed by the non-parametric duration dependence test, which shows evidence of negative duration dependence in runs of positive returns, consistent with the presence of rational expectations bubbles. Further analysis reveals departures from fundamental values in the initial sample subperiod ending with the Asian financial crisis in 1997. However, prices appear to be in line with fundamentals in the more recent post-1997 subperiod.