NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On The Possibility of Price Decreasing Bubbles

Philippe Weil

NBER Working Paper No. 2821
Issued in 1989
NBER Program(s):   ME

It is often argued that a rational bubble, because it is positive, must increase the price of a stock. This argument is not valid in general: as soon as bubbles affect interest rates, the fundamental value of a stock depends on whether or not a bubble is present. The existence of a rational bubble then might, by raising equilibrium interest rates, depress the fundamental to such an extent that the sum of the positive bubble and decreased fundamental falls short of the fundamental, no-bubble price. Under conditions made precise below, there can therefore be price decreasing bubbles, and an asset can be "undervalued."

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Document Object Identifier (DOI): 10.3386/w2821

Published: Econometrica, Vol. 58, no. 6 (1990): 1467-1474. citation courtesy of

 
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