Bubbles and trading in incomplete markets

We show that an intrinsic property of a large class of rational bubbles is their capacity to relax the agents’ debt limits. Any bubble that preserves the set of pricing kernels, or equivalently, the asset span, has effectively an identical effect on consumption and real interest rates as an appropri...

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Bibliographic Details
Published in:Journal of mathematical economics 2014-08, Vol.53, p.137-144
Main Authors: Bejan, Camelia, Bidian, Florin
Format: Article
Language:English
Subjects:
Arbitrage
Asset pricing
Credit
Dynamics
Economic growth
Economic theory
Incomplete markets
Limited enforcement
Market efficiency
Rational bubbles
Trade theory
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Summary:We show that an intrinsic property of a large class of rational bubbles is their capacity to relax the agents’ debt limits. Any bubble that preserves the set of pricing kernels, or equivalently, the asset span, has effectively an identical effect on consumption and real interest rates as an appropriate relaxation of debt limits, proportional to the size of the bubble. Thus the collapse of a bubble amounts to a contraction of agents’ debt limits, and conversely, a bubble can arise to supplement the credit available in the economy.
ISSN:0304-4068
DOI:10.1016/j.jmateco.2014.05.004