Uniqueness of asset prices in an exchange economy with unbounded utility |
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Authors: | Takashi Kamihigashi |
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Institution: | (1) Department of Economics, SUNY–Stony Brook, Stony Brook, NY 11794-4384, USA, US |
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Abstract: | Summary. This paper studies conditions under which the price of an asset is uniquely determined by its fundamental value – i.e., no
bubbles can arise – in Lucas-type asset pricing models with unbounded utility. After discussing Gilles and LeRoy's (1992)
example, we construct an example of a two-period, representative agent economy to demonstrate that bubbles can arise in a
standard model if utility is unbounded below, in which case the stochastic Euler equation may be violated. In an infinite
horizon framework, we show that bubbles cannot arise if the optimal sequence of asset holdings can be lowered uniformly without
incurring an infinite utility loss. Using this result, we develop conditions for the nonexistence of bubbles. The conditions
depend exclusively on the asymptotic behavior of marginal utility at zero and infinity. They are satisfied by many unbounded
utility functions, including the entire CRRA (constant relative risk aversion) class. The Appendix provides a complete market
version of our two-period example.
Received: January 22, 1996; revised version: February 18, 1997 |
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Keywords: | JEL Classification Numbers: C61 D51 G12 |
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