Rational Finite Bubbles

Franklin Allen and Gary Gorton

No 3707, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: There has been a long-running debate about 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.

Date: 1991-05
Note: ME
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Citations: View citations in EconPapers (6)

Published as Allen, Franklin and Gary Gorton. Churning Bubbles." Review of Economic Studies 60, 4 no. 205 (October 1993): 813-836.

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