On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type

30 Pages Posted: 20 Aug 1999  

Luigi Montrucchio

University of Turin

Fabio Privileggi

University of Turin - Department of Economics and Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2000

Abstract

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.

JEL Classification: C61, C62, D51, G12

Suggested Citation

Montrucchio, Luigi and Privileggi, Fabio, On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type (July 2000). Available at SSRN: https://ssrn.com/abstract=172168 or http://dx.doi.org/10.2139/ssrn.172168

Luigi Montrucchio

University of Turin ( email )

Piazza Arbarello, 8
Department of Applied Mathematics
I-10122 Turin
Italy
+39-011-6706227 (Phone)
+39-011-6706238 (Fax)

Fabio Privileggi (Contact Author)

University of Turin - Department of Economics and Statistics ( email )

Lungo Dora Siena 100 A
Torino, Turin - Piedmont 10153
Italy
+39-011-6702635 (Phone)
+39-011-6703895 (Fax)

HOME PAGE: http://www.unito.it/persone/fabio.privileggi

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