We study a simple static economy with collateralized loan contracts and an incomplete asset market. We study whether economic forces operate to keep asset price equal to fundamentals in this economy. We find that asset prices may be higher than the valuation of any agent in the economy, i.e.,...

When should we expect bubbles? Can levered intermediaries bid up risky asset prices through asset substitution? We study an economy with financial intermediaries that issue debt and equity to buy risky assets. Asset substitution alone cannot cause bubbles because it is priced into the...