TY - JOUR
T1 - On fragility of bubbles in equilibrium asset pricing models of Lucas-type
AU - Montrucchio, Luigi
AU - Privileggi, Fabio
N1 - Funding Information:
Received June 19, 1999; final version received February 23, 2000; published online April 12, 2001 In this paper we study the existence of bubbles for pricing equilibria in a pure exchange economy a la Lucas, with infinitely lived homogeneous agents. The model is analyzed under fairly general assumptions: no restrictions either on the stochastic process governing dividends’ distribution or on the utilities (possibly unbounded) are required. We prove that the pricing equilibrium is unique as long as the agents exhibit uniformly bounded relative risk aversion. A generic uniqueness result is also given regardless of agent’s preferences. A few ‘‘pathological’’ examples of economies exhibiting pricing equilibria with bubble components are constructed. Finally, a possible relationship between our approach and the theory developed by Santos and Woodford on ambiguous bubbles is investigated. The whole discussion sheds more insight on the common belief that bubbles are a marginal phenomenon in such models. Journal of Economic Literature Classification Numbers: C61, C62, D51, G12. ν 2001 Elsevier Science 1This research was partially supported by MURST (Italy), National Group on ‘‘Nonlinear Dynamics and Stochastic Models in Economics and Finance,’’ and by NATO CNR (Italy) under Grant 217.31. We are grateful to Tapan Mitra for giving the second author the opportunity to visit at the Department of Economics, Cornell University, while the present research was terminated. We also thank David Easley and all the participants of the Macro-Workshop, especially Karl Shell and Guido Cozzi, for valuable comments and constructive discussion. We have also benefitted from the insightful comments of two anonymous referees. The usual disclaimer applies.
PY - 2001
Y1 - 2001
N2 - In this paper we study the existence of bubbles for pricing equilibria in a pure exchange economy à la Lucas, with infinitely lived homogeneous agents. The model is analyzed under fairly general assumptions: no restrictions either on the stochastic process governing dividends' distribution or on the utilities (possibly unbounded) are required. We prove that the pricing equilibrium is unique as long as the agents exhibit uniformly bounded relative risk aversion. A generic uniqueness result is also given regardless of agent's preferences. A few "pathological" examples of economies exhibiting pricing equilibria with bubble components are constructed. Finally, a possible relationship between our approach and the theory developed by Santos and Woodford on ambiguous bubbles is investigated. The whole discussion sheds more insight on the common belief that bubbles are a marginal phenomenon in such models. Journal of Economic Literature Classification Numbers: C61, C62, D51, G12.
AB - In this paper we study the existence of bubbles for pricing equilibria in a pure exchange economy à la Lucas, with infinitely lived homogeneous agents. The model is analyzed under fairly general assumptions: no restrictions either on the stochastic process governing dividends' distribution or on the utilities (possibly unbounded) are required. We prove that the pricing equilibrium is unique as long as the agents exhibit uniformly bounded relative risk aversion. A generic uniqueness result is also given regardless of agent's preferences. A few "pathological" examples of economies exhibiting pricing equilibria with bubble components are constructed. Finally, a possible relationship between our approach and the theory developed by Santos and Woodford on ambiguous bubbles is investigated. The whole discussion sheds more insight on the common belief that bubbles are a marginal phenomenon in such models. Journal of Economic Literature Classification Numbers: C61, C62, D51, G12.
UR - https://www.scopus.com/pages/publications/0035211241
U2 - 10.1006/jeth.2000.2718
DO - 10.1006/jeth.2000.2718
M3 - Article
SN - 0022-0531
VL - 101
SP - 158
EP - 188
JO - Journal of Economic Theory
JF - Journal of Economic Theory
IS - 1
ER -