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Rational and Near-Rational Bubbles Without Drift

  • KevinJ. Lansing

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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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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