Asset shortages, liquidity and speculative bubbles
Gaetano Bloise and
Journal of Economic Theory, 2019, vol. 183, issue C, 952-990
We study the effect of asset shortages on liquidity in economies with limited enforcement of debt contracts. We establish that, under a suitable assumption in terms of gains from trade, liquidity does not dry up and trading volumes do not disappear as credit conditions worsen. The equilibrium outcome becomes arbitrarily close to a purely speculative equilibrium, and bubbles occur in the limit. The result applies to incomplete markets and, more generally, to equilibria where collateral constraints interfere with the additivity of the payoff pricing functional.
Keywords: Liquidity; Collateral; Credit; Conditional efficiency; Speculative bubble (search for similar items in EconPapers)
JEL-codes: D53 E44 G12 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:183:y:2019:i:c:p:952-990
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