Intrinsic bubbles and asset price volatility (*)

Bernhard Eckwert and Burkhard Drees ()
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Bernhard Eckwert: Department of Economics, University of Chemnitz, D-09107 Chemnitz, GERMANY

Economic Theory, 1997, vol. 9, issue 3, 499-510

Abstract: Under what conditions is the price of a bubbly asset more (less) volatile than the asset's market fundamental? The answer depends on agents' attitudes towards risk. If higher current consumption makes agents more (less) risk averse in the future, then the bubbly asset price fluctuates less (more) than the fundamental. This result shows that the interaction between intrinsic bubbles and asset fundamentals critically depends on a feature of the utility function that does not appear in standard models with time-separable utility.

Date: 1997
Note: Received: December 2, 1994; revised version December 18, 1995
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