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Rational asset pricing bubbles and portfolio constraints

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  • Hugonnier, Julien
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    Abstract

    This article shows that portfolio constraints can give rise to rational asset pricing bubbles in equilibrium even if there are unconstrained agents in the economy who can benefit from the induced limited arbitrage opportunities. Furthermore, it is shown that bubbles can lead to both multiplicity and real indeterminacy of equilibria. The general results are illustrated by two explicitly solved examples where seemingly innocuous portfolio constraints make bubbles a necessary condition for the existence of an equilibrium.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0022053112000579
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 147 (2012)
    Issue (Month): 6 ()
    Pages: 2260-2302

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    Handle: RePEc:eee:jetheo:v:147:y:2012:i:6:p:2260-2302

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    Web page: http://www.elsevier.com/locate/inca/622869

    Related research

    Keywords: Rational bubbles; Portfolio constraints; General equilibrium; Limited participation; Real indeterminacy;

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    Cited by:
    1. Theodoros M. Diasakos, 2012. "A Simple Characterization of Dynamic Completeness in Continuous Time," Discussion Paper Series, Department of Economics 201312, Department of Economics, University of St. Andrews, revised 02 Sep 2013.
    2. Robert A. Jarrow & Martin Larsson, 2014. "Informational Efficiency under Short Sale Constraints," Papers 1401.1851, arXiv.org.
    3. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," FMG Discussion Papers dp707, Financial Markets Group.
    4. Martin Larsson, 2013. "Non-Equivalent Beliefs and Subjective Equilibrium Bubbles," Papers 1306.5082, arXiv.org.

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