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Rational Finite Bubbles

Author

Listed:
  • Franklin Allen
  • Gary B. Gorton

Abstract

There has been a long-running debate whether stock market prices are determined by fundamentals. To date no consensus has been reached. An important issue in this debate concerns the circumstances in which deviations from fundamentals are consistent with rational behavior. A continuous-time example where there are a finite number of rational traders with finite wealth is presented. It is shown that a finitely-lived security can trade above its fundamental.

Suggested Citation

  • Franklin Allen & Gary B. Gorton, "undated". "Rational Finite Bubbles," Rodney L. White Center for Financial Research Working Papers 41-88, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:41-88
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. links for 2010-08-24
      by Brad DeLong in Grasping Reality with the Invisible Hand on 2010-08-25 09:04:43

    Citations

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    Cited by:

    1. Robert Vigfusson & Simon van Norden, 1996. "Avoiding the Pitfalls: Can Regime-Switching Tests Detect Bubbles?," Staff Working Papers 96-11, Bank of Canada.
    2. Simon van Norden & Huntley Schaller, 2002. "Fads or bubbles?," Empirical Economics, Springer, vol. 27(2), pages 335-362.
    3. van Norden, Simon, 1996. "Regime Switching as a Test for Exchange Rate Bubbles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 219-251, May-June.
    4. Tro Kortian, 1995. "Modern Approaches to Asset Price Formation: A Survey of Recent Theoretical Literature," RBA Research Discussion Papers rdp9501, Reserve Bank of Australia.
    5. Franklin Allen & Gary B. Gorton, "undated". "Rational Finite Bubbles," Rodney L. White Center for Financial Research Working Papers 41-88, Wharton School Rodney L. White Center for Financial Research.

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