Trading and rational security pricing bubbles
AbstractSecurities markets theory includes repo and distinguishes shorting from issuing. Here we revisit whether trading alone can give rise to Ponzi schemes and rational bubbles. We show that under the same institutional arrangements that limit re-hypothecation (e.g., through segregated haircut rules or explicit leverage constraints on haircut collecting dealers), (1) trading Ponzi schemes are prevented without having to assume uniform impatience, (2) for securities in positive net supply, bubbles are ruled out under complete markets but may occur when markets are incomplete. We give an example of such a bubble, under a finite present value of wealth.
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Bibliographic InfoPaper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 12010.
Length: 37 pages
Date of creation: Feb 2012
Date of revision:
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repo; short sale; bubble; repo specialness; Ponzi scheme; leverage.;
Other versions of this item:
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- D90 - Microeconomics - - Intertemporal Choice - - - General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-27 (All new papers)
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