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Bubbles and multiplicity of equilibria under portfolio constraints

Author

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  • Julien Hugonnier

    (University of Lausanne and Swiss Finance Institute)

Abstract

This article shows that, as long as agents are required to maintain positive wealth, the presence of portfolio constraints may give rise to asset pricing bubbles in equilibrium even if there are unconstrained agents in the economy who can benefit from the induced arbitrage opportunity. Furthermore, it is shown that the presence of bubbles in the aggregate price system can lead to both multiplicity and real indeterminacy of equilibrium. 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

  • Julien Hugonnier, 2008. "Bubbles and multiplicity of equilibria under portfolio constraints," Swiss Finance Institute Research Paper Series 08-28, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0828
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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1288380
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    Cited by:

    1. Chabakauri, Georgy, 2010. "Asset pricing with heterogeneous investors and portfolio constraints," LSE Research Online Documents on Economics 43142, London School of Economics and Political Science, LSE Library.
    2. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," 2012 Meeting Papers 636, Society for Economic Dynamics.

    More about this item

    Keywords

    Predictability; asset pricing bubbles; general equilibrium; portfolio constraints;

    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

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