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Non-Equivalent Beliefs and Subjective Equilibrium Bubbles

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  • Martin Larsson

Abstract

This paper develops a dynamic equilibrium model where agents exhibit a strong form of belief heterogeneity: they disagree about zero probability events. It is shown that, somewhat surprisingly, equilibrium exists in this setting, and that the disagreement about nullsets naturally leads to equilibrium asset pricing bubbles. The bubbles are subjective in the sense that they are perceived by some but not necessarily all agents. In contrast to existing models, bubbles arise with no restrictions on trade beyond a standard solvency constraint.

Suggested Citation

  • Martin Larsson, 2013. "Non-Equivalent Beliefs and Subjective Equilibrium Bubbles," Papers 1306.5082, arXiv.org.
    • Handle: RePEc:arx:papers:1306.5082
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    References listed on IDEAS

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    Cited by:

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    2. Sigrid Källblad, 2017. "Risk- and ambiguity-averse portfolio optimization with quasiconcave utility functionals," Finance and Stochastics, Springer, vol. 21(2), pages 397-425, April.

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