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 language | English (US) |
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Pages (from-to) | 453-464 |
Number of pages | 12 |
Journal | International Economic Review |
Volume | 38 |
Issue number | 2 |
DOIs | |
State | Published - May 1997 |