On the Possibility of Price Decreasing Bubbles

13 Pages Posted: 19 Jun 2004 Last revised: 18 Sep 2010

See all articles by Philippe Weil

Philippe Weil

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: 1989

Abstract

It is often argued that a rational bubble, because it is positive, must increase the price of a stock. This argument is not valid in general: as soon as bubbles affect interest rates, the fundamental value of a stock depends on whether or not a bubble is present. The existence of a rational bubble then might, by raising equilibrium interest rates, depress the fundamental to such an extent that the sum of the positive bubble and decreased fundamental falls short of the fundamental, no-bubble price. Under conditions made precise below, there can therefore be price decreasing bubbles, and an asset can be "undervalued."

Suggested Citation

Weil, Philippe, On the Possibility of Price Decreasing Bubbles (1989). NBER Working Paper No. w2821. Available at SSRN: https://ssrn.com/abstract=307115

Philippe Weil (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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