Portfolio constraints,differences in beliefs and bubbles |
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Institution: | 1. Economic Research Unit, Indian Statistical Institute, 203 Barackpore Trunk Road, 700108 Kolkata, India;2. Dipartimento di Scienze Economiche e Statistiche and CSEF, University of Napoli Federico II, Complesso Monte S. Angelo, Via Cintia, Napoli 80126, Italy |
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Abstract: | I propose an arbitrage-based theory of bubbles in economies with general portfolio constraints and differences in beliefs. I find that, in general, bubbles cannot exist unless the constraints restrict the demand for credit sufficiently to induce low interest rates. Speculation due to heterogeneous beliefs does not cause bubbles. Ruling out bubbles under asymmetric information requires stronger assumptions: the presence of some uninformed agents and mild portfolio restrictions (debt or borrowing constraints), or alternatively, the existence of some impatient and fully informed agents. |
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Keywords: | Portfolio constraints Rational bubbles Speculative bubbles Resale option Asymmetric information Heterogeneous beliefs |
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