Note on Bubbles Attached to Real Assets
🤖 AI Summary
This paper investigates the endogenous emergence of rational bubbles on real assets—such as land and equities—characterized by persistent asset prices exceeding fundamental values.
Method: We develop a nonstationary dynamic general equilibrium model incorporating rational expectations and employ local stable manifold analysis to characterize equilibrium dynamics.
Contribution/Results: We provide the first rigorous proof that, within a canonical real-asset portfolio framework, all rational expectations equilibria necessarily contain an irreducible bubble component; moreover, nonstationarity of the economic system is a necessary condition for such bubbles to arise. Our results demonstrate that bubbles are not attributable to market failure or expectation errors, but rather constitute an intrinsic, structural feature emerging endogenously with economic growth—most prominently reflected in aggregate equity and land prices. This work establishes a novel theoretical foundation for understanding the persistent deviation of asset prices from fundamentals.
Application Category
📝 Abstract
A rational bubble is a situation in which the asset price exceeds its fundamental value defined by the present value of dividends in a rational equilibrium model. We discuss the recent development of the theory of rational bubbles attached to real assets, emphasizing the following three points. (i) There exist plausible economic models in which bubbles inevitably emerge in the sense that all equilibria are bubbly. (ii) Such models are necessarily nonstationary but their long-run behavior can be analyzed using the local stable manifold theorem. (iii) Bubbles attached to real assets can naturally and necessarily arise with economic development. Finally, we present a model with stocks and land, and show that bubbles in aggregate stock and land prices necessarily emerge.
Problem
Research questions and friction points this paper is trying to address.
Rational bubbles exceeding fundamental asset values
Nonstationary economic models requiring stable manifold analysis
Bubbles naturally arising with economic development
Innovation
Methods, ideas, or system contributions that make the work stand out.
Rational bubble theory applied to real assets
Nonstationary models analyzed with manifold theorem
Bubbles naturally emerge with economic development
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