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Rational asset pricing bubbles and portfolio constraints

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  • Hugonnier, Julien

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.

Suggested Citation

  • Hugonnier, Julien, 2012. "Rational asset pricing bubbles and portfolio constraints," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2260-2302.
  • Handle: RePEc:eee:jetheo:v:147:y:2012:i:6:p:2260-2302 DOI: 10.1016/j.jet.2012.05.003
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    Citations

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    Cited by:

    1. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," FMG Discussion Papers dp707, Financial Markets Group.
    2. Alexander M. G. Cox & Zhaoxu Hou & Jan Obloj, 2014. "Robust pricing and hedging under trading restrictions and the emergence of local martingale models," Papers 1406.0551, arXiv.org, revised Jun 2015.
    3. Robert A. Jarrow, 2015. "Asset Price Bubbles," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 201-218, December.
    4. Gianluca Cassese, 2014. "Option Pricing in an Imperfect World," Papers 1406.0412, arXiv.org, revised Sep 2016.
    5. Theodoros M. Diasakos, 2011. "A Simple Characterization of Dynamic Completeness in Continuous Time," Carlo Alberto Notebooks 211, Collegio Carlo Alberto.
    6. Robert A. Jarrow & Martin Larsson, 2014. "Informational Efficiency under Short Sale Constraints," Papers 1401.1851, arXiv.org.
    7. Arnold, Lutz G. & Brunner, Stephan, 2015. "The economics of rational speculation in the presence of positive feedback trading," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 161-174.
    8. Martin Larsson, 2013. "Non-Equivalent Beliefs and Subjective Equilibrium Bubbles," Papers 1306.5082, arXiv.org.
    9. Tyler Abbot, 2017. "Heterogeneous Preferences, Constraints, and the Cyclicality of Leverage," Papers 1706.05877, arXiv.org, revised Nov 2017.
    10. Gianluca Cassese, 2017. "Asset pricing in an imperfect world," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(3), pages 539-570, October.
    11. Hugonnier, Julien & Prieto, Rodolfo, 2015. "Asset pricing with arbitrage activity," Journal of Financial Economics, Elsevier, vol. 115(2), pages 411-428.
    12. Bidian, Florin, 2015. "Portfolio constraints, differences in beliefs and bubbles," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 317-326.
    13. Alexander M. G. Cox & Zhaoxu Hou & Jan Obłój, 2016. "Robust pricing and hedging under trading restrictions and the emergence of local martingale models," Finance and Stochastics, Springer, vol. 20(3), pages 669-704, July.
    14. Chabakauri, Georgy, 2015. "Asset pricing with heterogeneous preferences, beliefs, and portfolio constraints," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 21-34.

    More about this item

    Keywords

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

    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; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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