Corresponding author: Kevin J. Lansing, Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA 94105, USA. Email: firstname.lastname@example.org
Rational and Near-Rational Bubbles Without Drift†
Article first published online: 16 NOV 2010
© The Author(s). Journal compilation © Royal Economic Society 2010
The Economic Journal
Volume 120, Issue 549, pages 1149–1174, December 2010
How to Cite
Lansing, K. J. (2010), Rational and Near-Rational Bubbles Without Drift. The Economic Journal, 120: 1149–1174. doi: 10.1111/j.1468-0297.2010.02385.x
For helpful comments and suggestions, I thank Eric Engstrom, Steve LeRoy, Kjersti-Gro Lindquist, participants at the 2007 Meeting of the Society for Economic Dynamics, the 2007 Meeting of the Society for Computational Economics, the 2007 Meeting of the Society for Nonlinear Dynamics and Econometrics, and the 2008 Norges Bank Symposium on Fundamental and Nonfundamental Asset Price Dynamics. I also thank two anonymous referees for thoughtful suggestions that improved the article.
- Issue published online: 16 NOV 2010
- Article first published online: 16 NOV 2010
- Submitted: 29 October 2008 Accepted: 10 October 2009
This article derives a general class of intrinsic rational bubble solutions in a Lucas-type asset pricing model. I show that the rational bubble component of the price–dividend ratio can evolve as a geometric random walk without drift, such that the mean of the bubble growth rate is zero. Driftless bubbles are part of a continuum of equilibrium solutions that satisfy a period-by-period no-arbitrage condition. I also derive a near-rational solution in which the agent's forecast rule is under-parameterised. The near-rational solution generates intermittent bubbles and other behaviour that is quantitatively similar to that observed in long-run US stock market data.