Non-Equivalent Beliefs and Subjective Equilibrium Bubbles

Martin Larsson

Papers from arXiv.org

Abstract: This paper develops a dynamic equilibrium model where agents exhibit a strong form of belief heterogeneity: they disagree about zero probability events. It is shown that, somewhat surprisingly, equilibrium exists in this setting, and that the disagreement about nullsets naturally leads to equilibrium asset pricing bubbles. The bubbles are subjective in the sense that they are perceived by some but not necessarily all agents. In contrast to existing models, bubbles arise with no restrictions on trade beyond a standard solvency constraint.

Date: 2013-06
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (2)

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