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Crashing of efficient stochastic bubbles

Araujo, Aloisio, Gama, Juan Pablo and Pascoa, Mario Rui (2019) Crashing of efficient stochastic bubbles Journal of Mathematical Economics, 84. pp. 136-143.

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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.

Item Type: Article
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
NameEmailORCID
Araujo, Aloisio
Gama, Juan Pablo
Pascoa, Mario Ruim.pascoa@surrey.ac.uk
Date : October 2019
DOI : 10.1016/j.jmateco.2019.07.005
Copyright Disclaimer : © 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Uncontrolled Keywords : Crashing; Efficient bubbles; Complete markets; Stochastic economies
Depositing User : Clive Harris
Date Deposited : 24 Sep 2019 08:18
Last Modified : 16 Oct 2019 09:28
URI: http://epubs.surrey.ac.uk/id/eprint/852766

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