Arbitrage, bubbles, and valuation

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8 Scopus citations

Abstract

The standard present value rule of asset pricing may fail in financial markets when infinitely many assets can be traded. I provide an example of asset payoffs and prices such that prices are arbitrage-free, and could be equilibrium prices in frictionless markets. Using valuation theory methods I show that asset prices can be meaningfully decomposed into a fundamental value and a pricing bubble. The fundamental value obeys the present value rule.

Original languageEnglish (US)
Pages (from-to)453-464
Number of pages12
JournalInternational Economic Review
Volume38
Issue number2
DOIs
StatePublished - May 1997

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