Bubbles and trading in incomplete markets

Bejan, Camelia; Bidian, Florin

doi:10.1016/j.jmateco.2014.05.004

“…Bejan and Bidian (2012) point out that bubble injections can occur also with incomplete markets. They also show that bubbles can lead to increases in the volume of trade and can explain a large number of asset pricing puzzles.…”

Section: Resultsmentioning

confidence: 98%

Martingale properties of self-enforcing debt

Bidian

¹

,

Bejan

²

2014

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Not-too-tight (NTT) debt limits are endogenous restrictions on debt that prevent agents from defaulting and opting for a specified continuation utility, while allowing for maximal credit expansion (Alvarez and Jermann 2000). For an agent facing some fixed prices for the Arrow securities, we prove that discounted NTT debt limits must differ by a martingale. Discounted debt limits are submartingales/martingales under an interdiction to trade/borrow, and can be supermartingales under a temporary interdiction to trade. With high interest rates and borrowing limited by the agent's ability to repay debt out of his future endowments, nonpositive NTT debt limits are unique. With low interest rates, bubbles limited by the size of the total martingale components in debt limits can be sustained in equilibrium. Bubbles arise in response to debt limits more restrictive (at the prevailing interest rates) than the total amount of self-enforcing debt allowed by the underlying enforcement limitations.

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“…Thus economies with endogenous (NTT) debt limits provide robust examples of bubbles, in the presence of fully rational, forward looking agents. Bejan and Bidian (2012) point out that bubble injections can occur also with incomplete markets. They also show that bubbles can lead to increases in the volume of trade and can explain a large number of asset pricing puzzles.…”

Section: Resultsmentioning

confidence: 98%

Martingale Properties of Self-Enforcing Debt

Bidian

¹

,

Bejan

²

2013

Self Cite

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Not-too-tight (NTT) debt limits are endogenous restrictions on debt that prevent agents from defaulting and opting for a specified continuation utility, while allowing for maximal credit expansion (Alvarez and Jermann 2000). For an agent facing some fixed prices for the Arrow securities, we prove that discounted NTT debt limits must differ by a martingale. Discounted debt limits are submartingales/martingales under an interdiction to trade/borrow, and can be supermartingales under a temporary interdiction to trade. With high interest rates and borrowing limited by the agent's ability to repay debt out of his future endowments, nonpositive NTT debt limits are unique. With low interest rates, bubbles limited by the size of the total martingale components in debt limits can be sustained in equilibrium. Bubbles arise in response to debt limits more restrictive (at the prevailing interest rates) than the total amount of self-enforcing debt allowed by the underlying enforcement limitations.

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“…Besides, the examination of rational bubble existence in stock markets, other applications have been found in real estate (Escobari and Jafarinejad, 2016;Xie and Chen, 2015;Wu, et al, 2017;Versmissen and Zietz, 2017); banking crises (Miao and Wang, 2015;Virtanen et al, 2018;Drehmann and Juselius, 2014); Debtto-GDP (Hong and Sraer, 2013;Bidian, 2015); Portfolio (Bidian, 2015;Bejan and Bidian, 2014;Bidian, 2016); Credit-to-GDP (Ftiti et al, 2016;Martin and Ventura, 2015) among others.…”

Section: Literature Reviewmentioning

confidence: 99%

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2019

IJEEP

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This study examined the existence of rational bubbles in oil prices by employing a frequency domain econophysics technique that have capacity to identify both explosive behaviour and bubbles in oil prices for the three largest oil future markets -WTI, Brent and OPEC basket. Our results show that the three prices experienced bubbles in four distinct periods. We attempt to provide some explanations on each of these bubbles using geopolitical, war and economic events. We equally noted that oil prices bubbles are largely influenced by the fact that oil is a major source of energy and is nonrenewable. The study observed that existence of bubbles have some economic consequences such as welfare loss resulting from distortion in prices and economic instability among others. We provide some policy recommendation.

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Bubbles and trading in incomplete markets

Cited by 11 publications

References 20 publications

Martingale properties of self-enforcing debt

Martingale properties of self-enforcing debt

Martingale Properties of Self-Enforcing Debt

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