Optimism, pessimism and financial bubbles

Bertrand Wigniolle

Journal of Economic Dynamics and Control, 2014, vol. 41, issue C, 188-208

Abstract: This paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank-dependent expected utility. This RDU assumption can be viewed as a transformation of probabilities depending on the pessimism/optimism of the agent. The results show that pessimism favors the existence of deterministic bubbles, when optimism may promote the existence of stochastic bubbles. Moreover, under pessimism, the RDU assumption may generate multiple bubbly equilibria. The RDU assumption also leads to new conditions ensuring the (absence of) Pareto-optimality of the competitive equilibrium without bubbles. These conditions still govern the existence of bubbles.

Keywords: Rational bubbles; RDU preferences (search for similar items in EconPapers)
JEL-codes: D81 D9 G1 O41 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Optimism, pessimism and financial bubbles (2014)
Working Paper: Optimism, pessimism and financial bubbles (2014)
Working Paper: Optimism, pessimism and financial bubbles (2014)
Working Paper: Optimism, pessimism and financial bubbles (2012)
Working Paper: Optimism, pessimism and financial bubbles (2012)
Working Paper: Optimism, pessimism and financial bubbles (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:41:y:2014:i:c:p:188-208

DOI: 10.1016/j.jedc.2014.01.022

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