Bubbles and multiplicity of equilibria under portfolio constraints

Julien Hugonnier

No 08-28, Swiss Finance Institute Research Paper Series from 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.

Keywords: Predictability; asset pricing bubbles; general equilibrium; portfolio constraints (search for similar items in EconPapers)
JEL-codes: D51 D52 D53 G11 G12 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2008-09
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0828

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