Rational bubbles on assets with a fundamental value

In this paper, we provide a simple framework to show the existence of stationary bubbles on dividend-yielding financial assets. These bubbles are compatible with a positive stationary fundamental value, rather than requiring its collapse in the long run. This result is obtained in an exchange overlapping generations economy with vintage financial assets that depreciate over time. New assets are introduced in each period, ensuring a constant aggregate supply of financial assets. Depreciation introduces a gap between the return of bubbles and the rate at which the dividends are discounted. Because the return of bubble can be lower or equal to the growth rate, we can have stationary equilibria with both a positive bubble and a positive fundamental value. Finally, our framework also allows us to discuss the role of the substitutability between financial assets on the level of bubbles and fundamental values.