New research reveals how asset prices can avoid dangerous bubbles
The article explores when asset prices are solely determined by their true value, without any bubbles forming. By analyzing different economic models, the researchers found that bubbles can occur if utility is unbounded below. However, in an infinite horizon setting, bubbles are prevented if asset holdings can be adjusted without causing infinite utility loss. The absence of bubbles depends on how marginal utility behaves at zero and infinity, with many utility functions meeting these conditions. The study provides insights into asset pricing in complex economic systems.