Adding a stage of signal acquisition to the expected utility model shows that Bayesian updating results in a well defined law of demand for financial information when asset return distributions are conjugate priors to signals such as in the gamma-Poisson case. Signals have a positive marginal...

We propose an extension of the class of rational expectations bubbles (REBs) to the more general rational beliefs setting of Kurz (1994a,b). In a potentially non-stationary but stationarizable environment, it is possible to hold more than one (small-r) “rational” expectation. When rational...

The solution to a linear model in which supply and/or demand depends on rational expectations of future prices can involve three parts, which we denote as the fundamental component, the deterministic bubble component, and the stochastic bubble component. This paper explores the properties of...

There are large cross-sectional differences in the probability and magnitude of mispricing among stocks. Mispricing is traditionally attributed to stock-specific frictions. We show that mispricing can be explained in a rational equilibrium where investors allocate investigative resources to...