Rational and Near-Rational Bubbles without Drift

Kevin Lansing

No 2007-10, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: This paper 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 agents forecast rule is under-parameterized. The near-rational solution generates intermittent bubbles and other behavior that is quantitatively similar to that observed in long-run U.S. stock market data.

Keywords: Stock - Prices; Forecasting (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Pages: 37
Date: 2007-10-01
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-for and nep-upt
Note: PDF date: October 8, 2009.
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Rational and Near-Rational Bubbles Without Drift (2010)
Working Paper: Rational and Near-Rational Bubbles Without Drift (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2007-10

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DOI: 10.24148/wp2007-10

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