Conditions for bubbles to arise under heterogeneous beliefs

Seunghyun Lee and Hyungbin Park

Papers from arXiv.org

Abstract: This paper studies the equilibrium price of a continuous time asset traded in a market with heterogeneous investors. We consider a positive mean reverting asset and two groups of investors who have different beliefs on the speed of mean reversion and the mean level. We provide an equivalent condition for bubbles to exist and show that price bubbles may not form even though there are heterogeneous beliefs. This condition is directly related to the drift term of the asset. In addition, we characterize the minimal equilibrium price as a unique $C^2$ solution of a differential equation and express it using confluent hypergeometric functions.

Date: 2020-12, Revised 2021-10
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