Rational Belief Bubbles

31 Pages Posted: 23 May 2018

See all articles by H. Sohn

H. Sohn

ETH Zürich

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology

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Date Written: May 5, 2018


We propose an extension of the class of rational expectations bubbles (REBs) to the more general rational beliefs setting of Kurz (1994a,b). In a potentially non-stationary but stationarizable environment, it is possible to hold more than one (small-r) “rational” expectation. When rational but diverse beliefs converge (“correlated beliefs”), they do not cancel each other out in aggregate anymore. This can make them an object of rational speculation. Diverse but correlated beliefs can thus account for speculative bubbles, without the need for irrational agents or limits to arbitrage. Many of the shortcomings of REBs that make rational bubbles implausible can be overcome once we relax the ergodicity requirement. In particular, we argue that the hitherto unexplained “bubble component” of REBs corresponds to the extension of the state space in Kurz and Motolese (2011).

Keywords: Asset pricing, Bubbles, Efficient markets, Rational expectations, Rational Beliefs, Aggregation, Heterogeneous expectations, Correlated beliefs

JEL Classification: B20, D53, D58, D81, D83, D84, D85, E13, G00

Suggested Citation

Sohn, H. and Sornette, Didier, Rational Belief Bubbles (May 5, 2018). Available at SSRN: https://ssrn.com/abstract=3176871 or http://dx.doi.org/10.2139/ssrn.3176871

H. Sohn (Contact Author)

ETH Zürich ( email )

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Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

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Southern University of Science and Technology

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Tokyo Institute of Technology

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