Rational equity bubbles

Zhou, Ge (2012): Rational equity bubbles. Forthcoming in:

Abstract

This paper discusses the existence of a bubble in the pricing of an asset that pays positive dividends. I show that rational bubbles can exist in a growing economy. The existence of bubbles depends on the relative magnitudes of risk aversion to consumption and to wealth. Furthermore, I examine how an exogenous shock in technology might trigger bubbles.

• Item Type: MPRA Paper
• Language: English
• Keywords: bubbles, the spirit of capitalism, growth
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General

References

Blanchard, O. J., and M. W. Watson, 1982, Bubbles, rational expectations and Financial markets. NBER Working Paper Series.

Brunnermeier, 2009, Bubbles. Unpublished Manuscript.

Diba, B. T., and H. I. Grossman, 1988, The theory of rational bubbles in stock prices. The Economic Journal, Vol. 98, No. 392, 746-754.

Kamihigashi, T., 2008, The spirit of capitalism, stock market bubbles and output fluctuations. International Journal of Economic Theory 4, 3-28.

Kamihigashi, T., 2009, Status seeking and bubbles. International Trade and Economic Dynamics - Essays in Memory of Koji Shimomura. Edited by T. Kamihigashi and L. Zhao: Springer-Verlag Berlin Heidelberg.

Kocherlakota, N. R., 1992, Bubbles and constraints on debt accumulation. Journal of Economic Theory 57, 245-256.

Kocherlakota, N. R., 2008, Exploding bubbles in a macroeconomi model. Unpublished Manuscript.

Kocherlakota, N. R., 2009, Bursting bubbles: consquences and cures. Unpublished Manuscript.

Kurz, M., 1968, Optimal economic growth and wealth effects. International Economic Review, Vol. 9, No. 3, 348-357.

LeRoy, S. F., 2004, Rational exuberance. Journal of Economic Literature, Vol. 42, No. 3, 783-804.

Martin, A., and J. Ventura, 2010, Economic growth with bubbles. NBER Working Paper.

O'Hara, M., 2008, Bubbles: some perspectives (and loose talk) from history. The Review of Financial Studies, v21, n1, 11-17.

Santos, M. S., and M. Woodford, 1997, Rational asset pricing bubbles. Econometrica, Vol. 65, No. 1, 19-57.

Tirole, J., 1982, On the possibility of speculation under rational expectations. Econometrica, Vol. 50, No. 5, 1163-1181.

Web, Max, 1958, The Protestant Ethic and The Spirit of Capitalism. New York: Charles Scribner's Sons.

Yanagawa, N., and G. M. Grossman, 1992, Asset bubbles and endogenous growth. NBER Working Paper.

Zhou, Ge, 2011, Rational bubbles and the spirit of capitalism. MPRA Paper 33988, the Munich University Library, Germany.

Zou, Heng-fu, 1991, "The spirit of capitalism" and long-run growth. The PRT Working Paper Series.