Rational Asset Pricing Bubbles Revisited

Preprint OPEN
Jan Werner (2012)
  • Subject:
    arxiv: Computer Science::Computational Engineering, Finance, and Science | Computer Science::Computer Science and Game Theory

Price bubble arises when the price of an asset exceeds the asset's fundamental value, that is, the present value of future dividend payments. The important result of Santos and Woodford (1997) says that price bubbles cannot exist in equilibrium in the standard dynamic asset pricing model with rational agents as long as assets are in strictly positive supply and the present value of total future resources is finite. This paper explores the possibility of asset price bubbles when either one of the sufficient conditions for non-existence of bubbles is violated. We demonstrate that there always exist equilibria with price bubbles on assets in zero supply. Further, we show that endogenous debt constraints generated by limited enforcement of trade are in a certain sense most prone to give rise to equilibrium price bubbles on assets in strictly positive supply and with infinite present value of total resources.
  • References (16)
    16 references, page 1 of 2

    Alvarez, F. and U. Jermann, “Efficiency, Equilibrium and Asset Prices with Risk of Default,” Econometrica, 2000.

    Araujo A., M. R. Pascoa, and J.P. Torres-Martnez (2009), ”Long-lived collateralized assets and bubbles,” working paper.

    Bejan C. and F. Bidian (2010), “Payout Policy and Bubbles,” Working Paper.

    Bejan C. and F. Bidian (2011), “Martingale Properties of Self-Enforcing Debt.” Working Paper,

    Gilles, C. and S. LeRoy, Asset price bubbles, in The New Palgrave Dictionary of Money and Finance, 1992

    Gilles, C. and S. LeRoy, “Bubbles and charges,” International Economic Review, 33, 323 - 339, 1992.

    Hellwig, Ch and G. Lorenzoni, “Bubbles and Self-Enforcing Debt,” Econometrica, vol 77, pg 1137-64, 2009.

    Harrison, M. and D. Kreps, “Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations,” Quarterly Journal of Economics, 42, (1978), 323-36.

    Huang K. and J. Werner, “Asset Price Bubbles in Arrow-Debreu and Sequential Equilibrium,” Economic Theory, 15, (2000), 253-278.

    Kocherlakota, N. “Bubbles and Constraints on Debt Accumulation,” Journal of Economic Theory, 57 1992.

  • Metrics
    No metrics available
Share - Bookmark