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Rational and Near-Rational Bubbles Without Drift

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  • KevinJ. Lansing

Abstract

This article derives a general class of intrinsic rational bubble solutions in a Lucas-type asset pricing model. I show that the rational bubble component of the price-dividend ratio can evolve as a geometric random walk without drift, such that the mean of the bubble growth rate is zero. Driftless bubbles are part of a continuum of equilibrium solutions that satisfy a period-by-period no-arbitrage condition. I also derive a near-rational solution in which the agent's forecast rule is under-parameterised. The near-rational solution generates intermittent bubbles and other behaviour that is quantitatively similar to that observed in long-run US stock market data. Copyright (C) The Author(s). Journal compilation (C) Royal Economic Society 2010.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 120 (2010)
Issue (Month): 549 (December)
Pages: 1149-1174

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Handle: RePEc:ecj:econjl:v:120:y:2010:i:549:p:1149-1174

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Citations

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Cited by:
  1. Airaudo, Marco & Cardani, Roberta & Lansing, Kevin J., 2013. "Monetary policy and asset prices with belief-driven fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1453-1478.
  2. Kevin J. Lansing, 2007. "Asset price bubbles," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct26.
  3. repec:dgr:uvatin:2013014 is not listed on IDEAS
  4. George A. Waters, 2011. "Endogenous Rational Bubbles," Working Paper Series 20111003, Illinois State University, Department of Economics.
  5. Takashi Kamihigashi, 2010. "Recurrent Bubbles," Discussion Paper Series DP2010-27, Research Institute for Economics & Business Administration, Kobe University, revised Nov 2010.
  6. Pei Kuang, 2013. "Imperfect Knowledge About Asset Prices and Credit Cycles," Discussion Papers 13-02r, Department of Economics, University of Birmingham.
  7. Bond, Derek & Gallagher, Emer & Ramsey, Elaine, 2012. "A preliminary investigation of northern Ireland's housing market dynamics," MPRA Paper 39806, University Library of Munich, Germany.
  8. Branch, William A. & Evans, George W., 2013. "Bubbles, crashes and risk," Economics Letters, Elsevier, vol. 120(2), pages 254-258.
  9. Lansing, Kevin J., 2012. "Speculative growth, overreaction, and the welfare cost of technology-driven bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 461-483.
  10. George W. Evans, 2011. "Comment on "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing"," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 61-71 National Bureau of Economic Research, Inc.
  11. Pei Kuang, 2013. "Imperfect Knowledge about Asset Prices and Credit Cycles," CDMA Working Paper Series 201303, Centre for Dynamic Macroeconomic Analysis.
  12. Cars Hommes & Mei Zhu, 2013. "Behavioral Learning Equilibria," Tinbergen Institute Discussion Papers 13-014/II, Tinbergen Institute.
  13. John Knight & Stephen Satchell & Nandini Srivastava, 2012. "Steady-State Distributions for Models of Bubbles: their Existence and Econometric Implications," Birkbeck Working Papers in Economics and Finance 1208, Birkbeck, Department of Economics, Mathematics & Statistics.
  14. Paolo Gelain & Kevin J. Lansing, 2013. "House prices, expectations, and time-varying fundamentals," Working Paper 2013/05, Norges Bank.
  15. Kevin J. Lansing, 2008. "Speculative growth and overreaction to technology shocks," Working Paper Series 2008-08, Federal Reserve Bank of San Francisco.

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