And variations in technology and risk will appropriately affect asset prices to allocate capital efficiently in a market system. But, on occasion, asset prices can vary by more than can be attributed to underlying fundamentals.
As risk premiums fall in an expansion, asset values and capital investment tend to be boosted, the economy experiences additional impetus, remembrances of recession fade, and risk premiums fall still further – sometimes to levels below any credible justification. There is, of course, a downside limit – somewhat above zero – where declines in risk premiums end.