Toward Bubble Clarity: A Comment on Miao and Wang

“Rational bubble” is a scientific term meaning that in a general equilibrium model with rational agents, the asset price (P) exceeds the fundamental value (V) defined by the present discounted value of dividends (D) computed using the stochastic discount factor of the marginal buyer of the asset. A large literature has identified attaching bubbles (P > V) to dividend-paying assets (D > 0) in a natural way as an important but challenging question. In an American Economic Review article, Jianjun Miao and Pengfei Wang (2018) claim to “provide a theory of rational stock price bubbles” and compare their results to the classical rational bubble literature. In the present article, we prove—contrary to their claim—the nonexistence of rational bubbles in their model. It is more appropriate to interpret their model as an example of multiple fundamental equilibria, where all equilibrium asset prices are equal to the present discounted value of dividends.