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Crashing of Efficient Stochastic Bubbles

Author

Listed:
  • Aloisio Araujo

    (IMPA and FGV EPGE)

  • Juan Pablo Gama

    (IMPA)

  • Mario R. Pascoa

    (University of Surrey)

Abstract

Efficiency is not commonly related to the crash of bubbles. However in the presence of wary agents, infinite-lived agents that are worried about distant losses, efficient bubbles may occur and, in a stochastic setting, these bubbles can crash. In this paper we characterize the Arrow-Debreu (AD) price and establish the relationship between the agents' concern about distant losses and the existence of pure charges in the AD price. We show that this pure charge induces efficient bubbles in the positive net-supply assets that complete the markets and that, as we enter some sub-tree, that pure charge may no longer present in the AD price for the sub-economy, implying the crash of the bubble. Finally, we give an example in which there is an efficient bubble with infinitely many crashes.

Suggested Citation

  • Aloisio Araujo & Juan Pablo Gama & Mario R. Pascoa, 2019. "Crashing of Efficient Stochastic Bubbles," School of Economics Discussion Papers 0819, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0819
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    File URL: https://repec.som.surrey.ac.uk/2019/DP08-19.pdf
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    References listed on IDEAS

    as
    1. Araujo, Aloisio & Novinski, Rodrigo & Páscoa, Mário R., 2011. "General equilibrium, wariness and efficient bubbles," Journal of Economic Theory, Elsevier, vol. 146(3), pages 785-811, May.
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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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