A Stochastic Bubble Forest

Amol Amol and Erzo G. J. Luttmer

No 811, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We consider an economy with overlapping generations of relatively patient consumers who live for two periods. There is within-cohort heterogeneity in old-age endowments that depends on an aggregate state. That state is independent and identically distributed across generations. We assume consumers in their old age cannot be forced to give up any real resources. A stationary equilibrium in which state-contingent claims can be sold against the collateral of a single safe bubble security is efficient. The same allocation is also an equilibrium outcome in an economy with a sufficient number of stochastic bubble securities that can be traded subject to collateral constraints. When consumers cannot sell any securities short at all, the same efficient allocation can be implemented with a stochastic bubble forest: a continuum of Lucas trees that bear no fruit, with prices that evolve stochastically. Dynamic spanning is a potential rationale for the existence of distinct bubble assets.

Keywords: Stochastic bubbles; Collateral constraints; Short-sale constraints; Efficient risk sharing (search for similar items in EconPapers)
JEL-codes: E30 E40 G10 (search for similar items in EconPapers)
Date: 2025-06-26
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.minneapolisfed.org/research/wp/wp811.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden (https://www.minneapolisfed.org/research/wp/wp811.pdf [301 Moved Permanently]--> https://researchdatabase.minneapolisfed.org/downloads/vd66w016h?locale=en)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:101202

DOI: 10.21034/wp.811

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().