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Asset price bubbles in Arrow-Debreu and sequential equilibrium


  • Kevin X.D. Huang

    () (Department of Economics, Utah State University, 3530 Old Main Hill, Logan, UT 84322, USA)

  • Jan Werner

    () (Department of Economics, University of Minnesota, 271 19th Avenue South, Minneapolis, MN 55455, USA)


Price bubbles in an Arrow-Debreu equilibrium in an infinite-time economy are a manifestation of lack of countable additivity of valuation of assets. In contrast, the known examples of price bubbles in a sequential equilibrium in infinite time cannot be attributed to the lack of countable additivity of valuation. In this paper we develop a theory of valuation of assets in sequential markets (with no uncertainty) and study the nature of price bubbles in light of this theory. We define a payoff pricing operator that maps a sequence of payoffs to the minimum cost of an asset holding strategy that generates it. We show that the payoff pricing functional is linear and countably additive on the set of positive payoffs if and only if there is no Ponzi scheme, provided that there is no restriction on long positions in the assets. In the known examples of equilibrium price bubbles in sequential markets valuation is linear and countably additive. The presence of a price bubble means that the dividends of an asset can be purchased in sequential markets at a cost lower than the asset's price. We present further examples of equilibrium price bubbles in which valuation is nonlinear, or linear but not countably additive.

Suggested Citation

  • Kevin X.D. Huang & Jan Werner, 2000. "Asset price bubbles in Arrow-Debreu and sequential equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 15(2), pages 253-278.
  • Handle: RePEc:spr:joecth:v:15:y:2000:i:2:p:253-278 Note: Received: 17 December 1998; revised version: 8 February 1999

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    References listed on IDEAS

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    More about this item


    Asset price bubble; Arrow-Debreu equilibrium; Sequential equilibrium; Arbitrage; Valuation.;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)


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