This chapter examines whether stock prices are determined by fundamentals or whether “bubbles” can exist. After considering a stylized model of a stock market in which there are three traders, the chapter turns to the implications of agency relationships between investors and portfolio managers for asset pricing. Two types of people who can obtain the qualifications necessary to become a portfolio manager are described: good portfolio managers and bad portfolio managers. The chapter shows that some of the portfolio managers' trades are not motivated by changes in information, liquidity shocks, or risk sharing. Instead they are churning their clients' portfolios in the hope of a speculative profit.
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