Bubbles and multiplicity of equilibria under portfolio constraints
AbstractThis article shows that, as long as agents are required to maintain positive wealth, the presence of portfolio constraints may give rise to asset pricing bubbles in equilibrium even if there are unconstrained agents in the economy who can benefit from the induced arbitrage opportunity. Furthermore, it is shown that the presence of bubbles in the aggregate price system can lead to both multiplicity and real indeterminacy of equilibrium. 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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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 08-28.
Length: 68 pages
Date of creation: Sep 2008
Date of revision:
Predictability; asset pricing bubbles; general equilibrium; portfolio constraints;
Find related papers by JEL classification:
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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