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On the Possibility of Price Decreasing Bubbles

  • Weil, Philippe

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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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 58 (1990)
Issue (Month): 6 (November)
Pages: 1467-74

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Handle: RePEc:ecm:emetrp:v:58:y:1990:i:6:p:1467-74
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  1. B. Douglas Bernheim & Kyle Bagwell, 1986. "Is Everything Neutral?," NBER Working Papers 2086, National Bureau of Economic Research, Inc.
  2. 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.
  3. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  4. repec:oup:qjecon:v:102:y:1987:i:3:p:697-700 is not listed on IDEAS
  5. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  6. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  7. Maurice Obstfeld & Kenneth Rogoff, 1982. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," NBER Working Papers 0855, National Bureau of Economic Research, Inc.
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