On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type
University of Turin
Department of Economics and Statistics "Cognetti de Martiis"
In this paper we study the existence of bubbles for pricing equilibria in a pure Exchange Economy a la Lucas, with infinitely lived homogeneous agents. The model is analyzed under fairly general assumptions: no restrictions either on the stochastic process governing dividends' distribution or on the utilities (possibly unbounded) are required. We prove that the pricing equilibrium is unique as long as the agents exhibit uniformly bounded relative risk aversion. A generic result of uniqueness is also given regardless of agent's preferences. Several "pathological" examples exhibiting equilibrium prices with bubble components are constructed. Finally, the presence of ambiguous bubbles along the theory developed by Santos and Woodford is studied by means of a transversality condition at infinity. The whole discussion sheds more insight on the common belief that bubbles are a marginal phenomenon in such models.
Number of Pages in PDF File: 30
JEL Classification: C61, C62, D51, G12working papers series
Date posted: August 20, 1999
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