Crashing of Efficient Stochastic Bubbles

Aloisio Araujo, Juan Pablo Gama and Mario R. Pascoa
Additional contact information
Juan Pablo Gama: IMPA
Mario R. Pascoa: University of Surrey

No 819, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: Efficiency is not commonly related to the crash of bubbles. However in the presence of wary agents, infinite-lived agents that are worried about distant losses, efficient bubbles may occur and, in a stochastic setting, these bubbles can crash. In this paper we characterize the Arrow-Debreu (AD) price and establish the relationship between the agents' concern about distant losses and the existence of pure charges in the AD price. We show that this pure charge induces efficient bubbles in the positive net-supply assets that complete the markets and that, as we enter some sub-tree, that pure charge may no longer present in the AD price for the sub-economy, implying the crash of the bubble. Finally, we give an example in which there is an efficient bubble with infinitely many crashes.

JEL-codes: D53 E40 E41 G10 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2019-03
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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https://repec.som.surrey.ac.uk/2019/DP08-19.pdf (application/pdf)

Related works:
Journal Article: Crashing of efficient stochastic bubbles (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0819

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