Rational Finite Bubbles

Franklin Allen and Gary Gorton

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: There has been a long-running debate whether stock market prices are determined by fundamentals. To date no consensus has been reached. An important issue in this debate concerns the circumstances in which deviations from fundamentals are consistent with rational behavior. A continuous-time example where there are a finite number of rational traders with finite wealth is presented. It is shown that a finitely-lived security can trade above its fundamental.

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Working Paper: Rational Finite Bubbles (1991)
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