Injecting rational bubbles

Narayana Kocherlakota

Journal of Economic Theory, 2008, vol. 142, issue 1, 218-232

Abstract: This paper proves two theorems about economies with a finite number of infinitely lived agents who trade a complete set of one-period Arrow securities and several infinitely lived securities at each date, subject to short-sales constraints. The first theorem in the paper considers an equilibrium to an economy of this kind. It proves that there exists another economy with perturbed short-sales constraints in which there is an allocation-equivalent equilibrium in which asset prices have a bubble. The second theorem extends to the result to the case in short-sales constraints are endogenously determined in the sense of Alvarez and Jermann [Efficiency, equilibrium, and asset pricing with risk of default, Econometrica 68 (2000) 775-797].

Date: 2008
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Working Paper: Injecting Rational Bubbles (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:142:y:2008:i:1:p:218-232

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