IDEAS home Printed from https://ideas.repec.org/a/eee/mateco/v53y2014icp145-152.html
   My bibliography  Save this article

Rational asset pricing bubbles and debt constraints

Author

Listed:
  • Werner, Jan

Abstract

Rational price bubble arises when the price of an asset exceeds the asset’s fundamental value, that is, the present value of future dividend payments. The important result of Santos and Woodford (1997) says that price bubbles cannot exist in equilibrium in the standard dynamic asset pricing model with rational agents facing borrowing constraints as long as assets are in strictly positive supply and the present value of total future resources is finite. This paper explores the possibility of asset price bubbles under endogenous debt constraints induced by limited enforcement of debt repayment. Equilibria with endogenous debt constraints are prone to have infinite present value of total resources. We show that asset price bubbles are likely to exist in such equilibria. Further, we demonstrate that there always exist equilibria with price bubbles on assets in zero supply.

Suggested Citation

  • Werner, Jan, 2014. "Rational asset pricing bubbles and debt constraints," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 145-152.
  • Handle: RePEc:eee:mateco:v:53:y:2014:i:c:p:145-152
    DOI: 10.1016/j.jmateco.2014.05.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304406814000652
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Araujo, Aloisio & Páscoa, Mário R. & Torres-Martínez, Juan Pablo, 2011. "Long-lived collateralized assets and bubbles," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 260-271.
    2. Kocherlakota, Narayana, 2008. "Injecting rational bubbles," Journal of Economic Theory, Elsevier, vol. 142(1), pages 218-232, September.
    3. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    4. LeRoy,Stephen F. & Werner,Jan, 2014. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, number 9781107024120, December.
    5. 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.
    6. Werner, Jan, 1997. "Arbitrage, Bubbles, and Valuation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 453-464, May.
    7. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
    8. Christian Hellwig & Guido Lorenzoni, 2009. "Bubbles and Self-Enforcing Debt," Econometrica, Econometric Society, vol. 77(4), pages 1137-1164, July.
    9. Kevin Huang & Jan Werner, 2004. "Implementing Arrow-Debreu equilibria by trading infinitely-lived securities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(3), pages 603-622, October.
    10. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
    11. Kevin X.D. Huang & Jan Werner, 2000. "Asset price bubbles in Arrow-Debreu and sequential equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 15(2), pages 253-278.
    12. Bejan, Camelia & Bidian, Florin, 2014. "Bubbles and trading in incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 137-144.
    13. Magill, Michael & Quinzii, Martine, 1994. "Infinite Horizon Incomplete Markets," Econometrica, Econometric Society, vol. 62(4), pages 853-880, July.
    14. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-969, July.
    15. Kocherlakota, Narayana R., 1992. "Bubbles and constraints on debt accumulation," Journal of Economic Theory, Elsevier, vol. 57(1), pages 245-256.
    16. Bidian, Florin & Bejan, Camelia, 2011. "Supplement to ``Martingale properties of self-enforcing debt''," MPRA Paper 36610, University Library of Munich, Germany, revised 12 Feb 2012.
    17. Jianjun Miao & Pengfei Wang, 2012. "Bubbles and Total Factor Productivity," American Economic Review, American Economic Association, vol. 102(3), pages 82-87, May.
    18. Miao, Jianjun & Wang, Pengfei, 2014. "Sectoral bubbles, misallocation, and endogenous growth," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 153-163.
    19. Florin Bidian & Camelia Bejan, 2015. "Martingale properties of self-enforcing debt," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(1), pages 35-57, September.
    20. Gilles, Christian & LeRoy, Stephen F, 1992. "Bubbles and Charges," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 323-339, May.
    21. Levine, David K. & Zame, William R., 1996. "Debt constraints and equilibrium in infinite horizon economies with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 103-131.
    22. Martins-da-Rocha, V. Filipe & Vailakis, Yiannis, 2012. "Endogenous debt constraints in collateralized economies with default penalties," Journal of Mathematical Economics, Elsevier, vol. 48(1), pages 1-13.
    23. Magill, Michael & Quinzii, Martine, 1996. "Incomplete markets over an infinite horizon: Long-lived securities and speculative bubbles," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 133-170.
    24. Kevin X.D. Huang, 2002. "Valuation in infinite-horizon sequential markets with portfolio constraints," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(1), pages 189-198.
    25. Loewenstein, Mark & Willard, Gregory A., 2000. "Rational Equilibrium Asset-Pricing Bubbles in Continuous Trading Models," Journal of Economic Theory, Elsevier, vol. 91(1), pages 17-58, March.
    26. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1138, June.
    27. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 323-336.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Miao, Jianjun, 2014. "Introduction to economic theory of bubbles," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 130-136.
    2. Bidian, Florin, 2016. "Robust bubbles with mild penalties for default," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 141-153.
    3. Bosi, Stefano & Le Van, Cuong & Pham, Ngoc-Sang, 2017. "Asset bubbles and efficiency in a generalized two-sector model," Mathematical Social Sciences, Elsevier, vol. 88(C), pages 37-48.
    4. Takashi Kamihigashi, 2015. "A Simple No-Bubble Theorem for Deterministic Sequential Economies," Discussion Paper Series DP2015-38, Research Institute for Economics & Business Administration, Kobe University.
    5. Bejan, Camelia & Bidian, Florin, 2014. "Bubbles and trading in incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 137-144.
    6. Takashi Kamihigashi, 2016. "A Simple Optimality-Based No-Bubble Theorem for Deterministic Sequential Economies," Discussion Paper Series DP2016-22, Research Institute for Economics & Business Administration, Kobe University.
    7. Stefano Bosi & Cuong Le Van & Ngoc-Sang Pham, 2014. "Intertemporal equilibrium with production: bubbles and efficiency," Documents de travail du Centre d'Economie de la Sorbonne 14043, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    8. repec:hal:journl:halshs-01316876 is not listed on IDEAS
    9. Takashi Kamihigashi, 2015. "A Simple No-Bubble Theorem," Discussion Paper Series DP2015-03, Research Institute for Economics & Business Administration, Kobe University.
    10. Kamihigashi, Takashi, 2018. "A Simple optimality-based no-bubble theorem for deterministic sequential economies with strictly monotone preferences," Mathematical Social Sciences, Elsevier, vol. 91(C), pages 36-41.
    11. Zhang, Yue-Jun & Wang, Jing, 2015. "Exploring the WTI crude oil price bubble process using the Markov regime switching model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 421(C), pages 377-387.
    12. Bidian, Florin, 2015. "Portfolio constraints, differences in beliefs and bubbles," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 317-326.
    13. Takashi Kamihigashi, 2015. "A Simple No-Bubble Theorem for Deterministic Dynamic Economies," Discussion Paper Series DP2015-24, Research Institute for Economics & Business Administration, Kobe University.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:53:y:2014:i:c:p:145-152. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jmateco .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.