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Rational Bubbles: A Clarification

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  • Tomohiro Hirano
  • Alexis Akira Toda

Abstract

"Rational bubble", as introduced by the famous paper on money by Samuelson (1958), means speculation backed by nothing. The large subsequent rational bubble literature has identified attaching bubbles to dividend-paying assets in a natural way as an important but challenging question. Miao and Wang (2018) claim to "provide a theory of rational stock price bubbles". Contrary to their claim, the present comment proves the nonexistence of rational bubbles in the model of Miao and Wang (2018). We also clarify the precise mathematical definition and the economic meaning of "rational bubble" in an accessible way to the general audience.

Suggested Citation

  • Tomohiro Hirano & Alexis Akira Toda, 2024. "Rational Bubbles: A Clarification," Papers 2407.14017, arXiv.org.
    • Handle: RePEc:arx:papers:2407.14017
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    References listed on IDEAS

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    1. Jianjun Miao & Pengfei Wang, 2018. "Asset Bubbles and Credit Constraints," American Economic Review, American Economic Association, vol. 108(9), pages 2590-2628, September.
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    3. Ana Fostel & John Geanakoplos, 2012. "Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 190-225, January.
    4. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    5. Feng Dong & Jianjun Miao & Pengfei Wang, 2020. "Asset Bubbles and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 68-98, August.
    6. Franklin Allen & Gadi Barlevy & Douglas Gale, 2022. "Asset Price Booms and Macroeconomic Policy: A Risk-Shifting Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(2), pages 243-280, April.
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