ARBITRAGE, BUBBLES, AND VALUATION

The standard present value rule of asset pricing may fail in financial markets when infinitely many assets can be traded. I provide an examp le of asset payoffs and prices such that prices are arbitrage-free, an d could be equilibrium prices in frictionless markets. Using valuation theory methods I show that asset prices can be meaningfully decompose d into a fundamental value and a pricing bubble. The fundamental value obeys the present value rule.