WP 2014-03 Stationary Bubbles
ABSTRACT. Tests of asset price bubbles typically focus on the stationarity properties of the dividend yield. Evidence of nonstationarity in the dividend yield is viewed as proof of bubbles, while stationarity is interpreted as absence of bubbles. For economies with arbitrary pricing kernels but stationary risk-free rates, I show that there exist periodically collapsing bubbles of the type introduced by Evans (1991) that are strictly stationary. Such bubbles give rise to stationary dividend yields.