Rational equilibrium asset-pricing bubbles in continuous trading models (Q1566903)

The authors present conditions under which rational asset-pricing bubbles may or may not exist for a standard class of continuous-time economies. The mathematical model under consideration acts on a finite time interval and contains a finite number of individuals. Each of them is described by preferences over intermediate and terminal consumption (represented by the von Neuman-Morgenstern utility), private endowments and initial endowments of securities. The asset market consists of one riskless borrowing and lending security and of some risky ones. The value of riskless asset is presented as a continuous predictable finite variation process. The cumulative dividend process and ones of risky security prices are stochastic processes such that sum of them, i.e. the gains process, is the continuous semimartingale. Agents manage their portfolio continuously through time to finance consumption. The problem for an agent is to choose admissible consumption plans and an admissible trading strategy to maximize utility subjected to a wealth constraint. A bubble represents the amount by which the equilibrium price of an asset exceeds the present value of its payouts. Some examples illustrates assumptions and theoretical results.