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Portfolio constraints, differences in beliefs and bubbles

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  • Bidian, Florin

Abstract

I propose an arbitrage-based theory of bubbles in economies with general portfolio constraints and differences in beliefs. I find that, in general, bubbles cannot exist unless the constraints restrict the demand for credit sufficiently to induce low interest rates. Speculation due to heterogeneous beliefs does not cause bubbles. Ruling out bubbles under asymmetric information requires stronger assumptions: the presence of some uninformed agents and mild portfolio restrictions (debt or borrowing constraints), or alternatively, the existence of some impatient and fully informed agents.

Suggested Citation

  • Bidian, Florin, 2015. "Portfolio constraints, differences in beliefs and bubbles," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 317-326.
  • Handle: RePEc:eee:mateco:v:61:y:2015:i:c:p:317-326
    DOI: 10.1016/j.jmateco.2015.10.001
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    Cited by:

    1. Boucekkine, Raouf & Nishimura, Kazuo & Venditti, Alain, 2015. "Introduction to financial frictions and debt constraints," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 271-275.

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