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Bubbles and trading in incomplete markets

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  • Bejan, Camelia
  • Bidian, Florin

Abstract

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.

Suggested Citation

  • Bejan, Camelia & Bidian, Florin, 2014. "Bubbles and trading in incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 137-144.
    • Handle: RePEc:eee:mateco:v:53:y:2014:i:c:p:137-144
    DOI: 10.1016/j.jmateco.2014.05.004
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    References listed on IDEAS

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    Cited by:

    1. Miao, Jianjun, 2014. "Introduction to economic theory of bubbles," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 130-136.
    2. Bidian, Florin, 2016. "Robust bubbles with mild penalties for default," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 141-153.
    3. Florin Bidian & Camelia Bejan, 2015. "Martingale properties of self-enforcing debt," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(1), pages 35-57, September.
    4. Bidian, Florin, 2015. "Portfolio constraints, differences in beliefs and bubbles," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 317-326.
    5. Werner, Jan, 2014. "Rational asset pricing bubbles and debt constraints," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 145-152.

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