Consumption and bubbles

Some studies characterize bubbles as speculative phenomena in which investors pay more than the value of the asset’s dividend stream in anticipation of receiving a profit by selling the asset later. We study the number of consumption opportunities as a necessary condition for the existence of bubbles. Our model permits continuous trading over a finite horizon, but it also assumes investors consume at discrete dates. Our main result is that when investors appropriately prefer more consumption to less, there are no bubbles on the prices of those assets that contribute to the aggregate financial wealth if the number of consumption opportunities is uniformly bounded across states of nature. This result clearly identifies market clearing as an additional restriction that helps to determine the martingale properties of equilibrium asset prices. ∗University of Maryland. Loewenstein may be reached at [email protected], and Willard may be reached at [email protected]. We thank Phil Dybvig for his comments. Consumption and Bubbles