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On The Possibility of Price Decreasing Bubbles

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Philippe Weil

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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."

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2821.

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Date of creation: Jan 1989
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Handle: RePEc:nbr:nberwo:2821

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-87, August. [Downloadable!] (restricted)
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  2. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February. [Downloadable!] (restricted)
  3. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September. [Downloadable!] (restricted)
  4. Bernheim, B Douglas & Bagwell, Kyle, 1988. "Is Everything Neutral?," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 308-38, April. [Downloadable!] (restricted)
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  5. West, Kenneth D, 1988. " Bubbles, Fads and Stock Price Volatility Tests: A Partial Evaluation," Journal of Finance, American Finance Association, vol. 43(3), pages 639-56, July. [Downloadable!] (restricted)
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  6. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March. [Downloadable!] (restricted)
  7. Diba, Behzad T & Grossman, Herschel I, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 697-700, August. [Downloadable!] (restricted)
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  1. Abbigail Chiodo & Massimo Guidolin & Michael T. Owyang & Makoto Shimoji, 2003. "Subjective probabilities: psychological evidence and economic applications," Working Papers 2003-009, Federal Reserve Bank of St. Louis. [Downloadable!]
  2. Simon van Norden & Robert Vigfusson, 1996. "Avoiding the Pitfalls: Can Regime-Switching Tests Detect Bubbles?," Meeting papers 9603001, EconWPA. [Downloadable!]
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  3. Kevin J. Lansing, 2007. "Rational and near-rational bubbles without drift," Working Paper Series 2007-10, Federal Reserve Bank of San Francisco. [Downloadable!]
  4. Simon van Norden, 1995. "Regime Switching as a Test for Exchange Rate Bubbles," Econometrics 9502001, EconWPA, revised 09 Aug 1995. [Downloadable!]
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  5. Eduardo Giménez, 2007. "On the positive fundamental value of money with short-sale constraints," Annals of Finance, Springer, vol. 3(4), pages 455-469, October. [Downloadable!] (restricted)
  6. Ricardo J. Caballero & Mohamad L. Hammour, 2002. "Speculative Growth," NBER Working Papers 9381, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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