INTRINSIC BUBBLES AND MEAN-REVERTING FUNDAMENTALS

'Intrinsic bubbles' (i.e., bubbles which are related only to fundament als) are considered in a simple asset pricing model where fundamentals follow an Ornstein-Uhlenbeck process. It is shown that such bubbles i mply an explosive path for the expectation of the asset price. It is a lso shown that the conditional variance of the asset price diverges in finite time. Intrinsic bubbles therefore imply highly nonstationary b ehaviour for the asset price even when the underlying fundamental to w hich they are related is stationary.