Rational and Near‐Rational Bubbles Without Drift

Bibliographic Data

ID9716293
AuthorsKevin J Lansing (0000-0002-4905-0274, Federal Reserve Bank of San Francisco, corresponding author)
Year2010
Volume120
Issue549
Pages1149-1174
Publication date2010-12-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueThe Economic Journal (JOURNAL)
Journal identifiersISSN: 0013-0133 • E-ISSN: 1468-0297
PublisherOxford University Press (OUP) (PUBLISHER)
DOI10.1111/j.1468-0297.2010.02385.x
OpenAlexW3021951040
LanguageEN
Citations received1
References cited45

This article derives a general class of intrinsic rational bubble solutions in a Lucas-type asset pricing model. I show that the rational bubble component of the price-dividend ratio can evolve as a geometric random walk without drift, such that the mean of the bubble growth rate is zero. Driftless bubbles are part of a continuum of equilibrium solutions that satisfy a period-by-period no-arbitrage condition. I also derive a near-rational solution in which the agent's forecast rule is under-parameterised. The near-rational solution generates intermittent bubbles and other behaviour that is quantitatively similar to that observed in long-run US stock market data. Copyright (C) The Author(s). Journal compilation (C) Royal Economic Society 2010

Arbitrage · Asset (computer security · Bubble · Capital asset pricing model · Dividend · Econometrics · Economics · Financial economics · Mathematical economics · Mechanics · Neoclassical economics · Physics · Random walk · Rational agent · Rational expectations · Rational surface · Statistics · Complex Systems and Time Series Analysis · Computer Science · Economic theories and models · Finance · Financial Markets and Investment Strategies · Mathematics

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