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Bubbles as Payoffs at Infinity

Author

Listed:
  • Christian Gilles
  • Stephen F. LeRoy

Abstract

We define rational bubbles to be securities with payoffs occurring in the infinitely distant future and investigate the behavior of bubble 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, "undated". "Bubbles as Payoffs at Infinity," Finance and Economics Discussion Series 1996-09, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    • Handle: RePEc:fip:fedgfe:1996-09
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    File URL: http://www.federalreserve.gov/pubs/feds/1996/199609/199609pap.pdf
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    Cited by:

    1. is not listed on IDEAS
    2. Bruder, Benjamin & Hereil, Pierre & Roncalli, Thierry, 2011. "Managing sovereign credit risk in bond portfolios," MPRA Paper 36673, University Library of Munich, Germany.
    3. Stephen F. LeRoy, 2012. "Infinite Portfolio Strategies," Contemporary Economics, Vizja University, vol. 6(4), December.
    4. 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.
    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.
    6. 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.

    More about this item

    Keywords

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    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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