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Bubbles as payoffs at infinity (*)

Author

Listed:
  • Christian Gilles

    (Board of Governors, Federal Reserve System, Washington, DC 20551, USA)

  • Stephen F. LeRoy

    (Carlson School of Management, University of Minnesota, Minneapolis, MN 55455, USA)

Abstract

We define rational bubbles to be securities with payoffs occurring in the infinitely distant future and investigate the behavior of bubbles values. We extend our analysis to a setting of uncertainty. In an infinite horizon arbitrage-free model of asset prices, we interpret the money market account as the value of a particular bubble; a similar interpretation holds for other assets related to the state-price deflator and to payoffs on bonds maturing in the distant future. We present three applications of this characterization of bubbles.

Suggested Citation

  • Christian Gilles & Stephen F. LeRoy, 1997. "Bubbles as payoffs at infinity (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(2), pages 261-281.
    • Handle: RePEc:spr:joecth:v:9:y:1997:i:2:p:261-281
    Note: Received: October 9, 1992; revised version December 1, 1995
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    Cited by:

    1. Bruder, Benjamin & Hereil, Pierre & Roncalli, Thierry, 2011. "Managing sovereign credit risk in bond portfolios," MPRA Paper 36673, University Library of Munich, Germany.
    2. Gianluca Cassese, 2017. "Asset pricing in an imperfect world," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(3), pages 539-570, October.
    3. Vinod Cheriyan & Anton J. Kleywegt, 2016. "A dynamical systems model of price bubbles and cycles," Quantitative Finance, Taylor & Francis Journals, vol. 16(2), pages 309-336, February.
    4. Stephen F. LeRoy, 2012. "Infinite Portfolio Strategies," Contemporary Economics, Vizja University, vol. 6(4), December.
    5. Kountzakis, C. & Polyrakis, I.A., 2013. "Coherent risk measures in general economic models and price bubbles," Journal of Mathematical Economics, Elsevier, vol. 49(3), pages 201-209.

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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