Asset shortages, liquidity and speculative bubbles

Research output: Contribution to journalArticle

Abstract

We study the effect of asset shortages on liquidity in economies with limited enforcement of debt contracts. We establish that, under a suitable assumption in terms of gains from trade, liquidity does not dry up and trading volumes do not disappear as credit conditions worsen. The equilibrium outcome becomes arbitrarily close to a purely speculative equilibrium, and bubbles occur in the limit. The result applies to incomplete markets and, more generally, to equilibria where collateral constraints interfere with the additivity of the payoff pricing functional.

Original languageEnglish (US)
Pages (from-to)952-990
Number of pages39
JournalJournal of Economic Theory
Volume183
DOIs
StatePublished - Sep 1 2019

Fingerprint

Speculative bubbles
Assets
Liquidity
Shortage
Trading volume
Bubble
Pricing
Collateral constraint
Gains from trade
Incomplete markets
Additivity
Credit
Limited enforcement
Debt contracts

Keywords

  • Collateral
  • Conditional efficiency
  • Credit
  • Liquidity
  • Speculative bubble

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Asset shortages, liquidity and speculative bubbles. / Bloise, G.; Citanna, Alessandro.

In: Journal of Economic Theory, Vol. 183, 01.09.2019, p. 952-990.

Research output: Contribution to journalArticle

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