Rational bubbles in portfolios with fundamental value

Lise Clain-Chamosset-Yvrard, Xavier Raurich and Thomas Seegmuller ()
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Thomas Seegmuller: Aix-Marseille Univ., CNRS, AMSE, Marseille, France. 5 Boulevard Maurice Bourdet CS 50498 F-13205 Marseille cedex 1, France

No 2404, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: In this paper, we provide a framework in which a stationary bubble can exist on a portfolio of dividend-yielding assets. Consistent with standard asset pricing theory, this portfolio bubble is defined as the difference between the portfolio market price and the present value of its future dividend stream. This bubble can coexist with a positive stationary fundamental value, without requiring the collapse of the latter over time. This result is obtained in an exchange overlapping generations economy featuring both newly issued and pre-existing financial assets that depreciate over time, and jointly constitute the asset portfolio. The introduction of new assets in each period decouples the return on bubbles from the effective discount rate applied to dividends. As a result, stationary equilibria can exist with both a positive bubble and a positive fundamental component in the portfolio value. Finally, our framework also allows us to discuss the role of the substitutability between financial assets on the level of bubbles and fundamental values.

Keywords: Rational bubbles; financial assets; fundamental value (search for similar items in EconPapers)
JEL-codes: E21 E44 G12 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-dge
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