Bubbles as Payoffs at Infinity
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.
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/1996/199609/199609pap.pdf
Part of Series: Finance and Economics Discussion Series
Pages: 30 pages