Rational Bubbles: A Clarification

TL;DR

This paper clarifies the concept of rational bubbles, critiques a recent model claiming to explain them, and proves their nonexistence within that framework, providing accessible definitions and insights.

Contribution

It offers a clear mathematical and economic clarification of rational bubbles and demonstrates their nonexistence in the Miao and Wang (2018) model.

Findings

Proves nonexistence of rational bubbles in Miao and Wang (2018) model

Provides accessible definitions of rational bubbles

Clarifies the mathematical and economic meaning of rational bubbles

Abstract

"Rational bubble", as introduced by the famous paper on money by Samuelson (1958), means speculation backed by nothing. The large subsequent rational bubble literature has identified attaching bubbles to dividend-paying assets in a natural way as an important but challenging question. Miao and Wang (2018) claim to "provide a theory of rational stock price bubbles". Contrary to their claim, the present comment proves the nonexistence of rational bubbles in the model of Miao and Wang (2018). We also clarify the precise mathematical definition and the economic meaning of "rational bubble" in an accessible way to the general audience.