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arXiv · 1306.5082

Non-Equivalent Beliefs and Subjective Equilibrium Bubbles

Martin Larsson
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Abstract

This paper develops a dynamic equilibrium model where agents exhibit a strong form of belief heterogeneity: they disagree about zero probability events. It is shown that, somewhat surprisingly, equilibrium exists in this setting, and that the disagreement about nullsets naturally leads to equilibrium asset pricing bubbles. The bubbles are subjective in the sense that they are perceived by some but not necessarily all agents. In contrast to existing models, bubbles arise with no restrictions on trade beyond a standard solvency constraint.

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Martin Larsson. 2013-06-21. Non-Equivalent Beliefs and Subjective Equilibrium Bubbles. https://arxiv.org/abs/1306.5082

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