Wealth preference and rational bubbles

Rational and Irrational Bubbles

Relative Wealth Concerns and Financial Bubbles

We present a simple yet fully rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining the presence and dynamics of financial “bubbles.” Because our model has a finite horizon, our explanation for the existence of bubbles is distinct from typical models of bubbles. We consider a finite-horizon overlapping generations model and show ...

Endogenous Rational Bubbles

A weighted replicator dynamic describes how agents switch between a forecast based on fundamentals, a rational bubble forecast and a re‡ective forecast, a weighted average of the former two. If the innovations to the extraneous martingale have a similar magnitude to those of the dividend process and agents are su¢ ciently aggressive in switching forecasting strategies, a signi…cant portion of t...

Injecting rational bubbles

This paper proves two theorems about economies with a finite number of infinitely lived agents who trade a complete set of one-period Arrow securities and several infinitely lived securities at each date, subject to short-sales constraints. The first theorem in the paper considers an equilibrium to an economy of this kind. It proves that there exists another economy with perturbed short-sales c...

Rational Equity Bubbles

People use to believe that no bubble can exist in an infinite-horizon model with a finite number of rational individuals. However, the opinion is true only for the baseline case. In the baseline model, wealth merely provides consumption flows, which individuals only care about. No one likes to hold an asset, whose price is above its fundamental value, forever. Sooner or later, individuals will ...