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Toward Bubble Clarity: A Comment on Miao and Wang

Author

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  • Tomohiro Hirano
  • Alexis Akira Toda

Abstract

“Rational bubble” is a scientific term meaning that in a general equilibrium model with rational agents, the asset price (P) exceeds the fundamental value (V) defined by the present discounted value of dividends (D) computed using the stochastic discount factor of the marginal buyer of the asset. A large literature has identified attaching bubbles (P > V) to dividend-paying assets (D > 0) in a natural way as an important but challenging question. In an American Economic Review article, Jianjun Miao and Pengfei Wang (2018) claim to “provide a theory of rational stock price bubbles” and compare their results to the classical rational bubble literature. In the present article, we prove—contrary to their claim—the nonexistence of rational bubbles in their model. It is more appropriate to interpret their model as an example of multiple fundamental equilibria, where all equilibrium asset prices are equal to the present discounted value of dividends.

Suggested Citation

  • Tomohiro Hirano & Alexis Akira Toda, 2025. "Toward Bubble Clarity: A Comment on Miao and Wang," Econ Journal Watch, Econ Journal Watch, vol. 22(1), pages 1-1–17, March.
    • Handle: RePEc:ejw:journl:v:22:y:2025:i:1:p:1-17
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    More about this item

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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