Rational Equilibrium Asset-Pricing Bubbles in Continuous Trading Models

We study rational equilibrium asset-pricing bubbles in an economic environment in which agents are allowed to trade continuously, including as special cases some models from financial economics. For positive net supply assets, we present new necessary and sufficient conditions for the absence of bubbles in complete and incomplete markets equilibria with several types of borrowing constraints. For zero net supply assets, including financial derivatives with finite maturities, we show that bubbles can generally exist and have properties different from their discrete-time, infinite-horizon counterparts. We introduce a probabilistic approach to studying bubbles, generalizing analogs of existing results in the discrete-time bubbles literature. Journal of Economic Literature Classification Numbers: D50, G12, G13.

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