Recurrent Bubbles

Takashi Kamihigashi

No DP2010-27, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We study rational bubbles in a standard linear asset price model. We first consider a class of bubble processes driven by multiplicative iid shocks. We show that a bubble process in this class either diverges to infinity with probability one, converges to zero with probability one, or keeps fluctuating forever with probability one, depending on investors' "con dence" in expected bubble growth. We call a bubble process having the last property "recurrent." We develop sufficient conditions for a bubble process to be recurrent when it is driven by non-iid shocks, when the risk-free interest rate is not constant, and when the process is driven by non-iid shocks and the risk-free interest rate is not constant. In the last case we demonstrate via simulation that there can be a prolonged period in which both the bubble and the interest rate stay close to zero.

Pages: 44 pages
Date: 2010-10, Revised 2010-11
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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2010-27.pdf First version, 2010 (application/pdf)

Related works:
Journal Article: RECURRENT BUBBLES (2011)
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