On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type

Luigi Montrucchio and Fabio Privileggi

POLIS Working Papers from Institute of Public Policy and Public Choice - POLIS

Abstract: In this paper we study the existence of bubbles for pricing equilibria in a pure Exchange Economy a' la Lucas, with infinitely lived homogeneous agents. The model is analyzed under fairly general assumptions: no restrictions either on the stochastic process governing dividends' distribution or on the utilities (possibly unbounded) are required. We prove that the pricing equilibrium is unique as long as the agents exhibit uniformly bounded relative risk aversion. A generic result of uniqueness is also given regardless of agent's preferences. Several ''pathological'' examples exhibiting equilibrium prices with bubble components are constructed. Finally, the presence of ambiguous bubbles along the theory developed by Santos and Woodford is studied by means of a transversality condition at infinity. The whole discussion sheds more insight on the common belief that bubbles are a marginal phenomenon in such models.

JEL-codes: C61 C62 D51 G12 (search for similar items in EconPapers)
Pages: 42 pages
Date: 1999-07
New Economics Papers: this item is included in nep-fin and nep-mic
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Citations: View citations in EconPapers (44)

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Related works:
Journal Article: On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type (2001)
Working Paper: On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:uca:ucapdv:5

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