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.
Keywords: Asset prices, money-market account, state-price deflator
Full paper (303 KB PDF)
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