Trading and rational security pricing bubbles

URL des Documents de travail : https://centredeconomiesorbonne.univ-paris1.fr/document-de-travail-du-ces/Documents de travail du Centre d'Economie de la Sorbonne 2012.10 - ISSN : 1955-611XSecurities markets theory includes repo and distinguishes shorting from issuing. Here we revisit whether trading alone can give rise to Ponzi schemes and rational bubbles. We show that under the same institutional arrangements that limit re-hypothecation (e.g., through segregated haircut rules or explicit leverage constraints on haircut collecting dealers), (1) trading Ponzi schemes are prevented without having to assume uniform impatience, (2) for securities in positive net supply, bubbles are ruled out under complete markets but may occur when markets are incomplete. We give an example of such a bubble, under a finite present value of wealth.Toute théorie des titres doit inclure une théorie des pensions livrées. Sans elle, on ne peut comprendre la valeur de possession associée à la possession physique d'un titre. Sans pensions livrées, il y a confusion entre l'émission des titres et leur vente à découvert ; entre marchés primaire et secondaire. Notre théorie des pensions livrées nous permet une telle distinction. Nous examinons les chaînes de Ponzi et des bulles spéculatives au sein du marché secondaire uniquement. On imagine donc une situation somme toute d'un grand réalisme pratique : celle où le marché primaire est inaccessible. Nous le supposerons fermé. Nous montrons que les mêmes arrangements institutionnels qui limitent la rehypothécation limitent les chaînes de Ponzi au sein du marché secondaire mais semblent favoriser la présence de bulles spéculatives qui existent même pour les titres en quantité positive quand les marchés sont incomplets. L'ouverture libre du marché primaire élimineraient alors de telle bulles. Nous donnons un exemple d'existence de bulle spéculative secondaire alors même que la richesse initiale est limitée

Trading and rational security pricing bubbles

Securities markets theory includes repo and distinguishes shorting from issuing. Here we revisit whether trading alone can give rise to Ponzi schemes and rational bubbles. We show that under the same institutional arrangements that limit re-hypothecation (e.g., through segregated haircut rules or explicit leverage constraints on haircut collecting dealers), (1) trading Ponzi schemes are prevented without having to assume uniform impatience, (2) for securities in positive net supply, bubbles are ruled out under complete markets but may occur when markets are incomplete. We give an example of such a bubble, under a finite present value of wealth.Repo, short sale, bubble, repo specialness, Ponzi scheme, leverage, trading.

The Dollar Squeeze of the Financial Crisis

By Covered Interest rate Parity (CIP), the FX swap implied currency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro-Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the "convenience yield" associated with that currency. This is similar to specialness in repro markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis.FX swaps, repo, Euro-Dollar currency basis, the 2008 dollar squeeze, possession.

Fiat money and the value of binding portfolio constraints

We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for inter-temporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of inter-temporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience

Fiat money and the value of binding portfolio constraints

We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for inter-temporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of inter-temporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience

Fiat money and the value of binding portfolio constraints

We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for intertemporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of intertemporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience

Bancruptcy in a model of unsecured claims

We study a two periods model of incomplete markets with nominal assets unsecured by collateral, where agents can go bankrupt but there are no bankruptcy penalties entering directly in the utility function. We address two cases: first, a proportional reimbursement rule under bounded short sales and limited liability and, secondly, a nonproportional reimbursement rule, favoring smaller claims, without bounds on short-sales, but assuming that liability approaches total garnishment as debt goes to infinity.Bankruptcy, Incomplete markets, Limited liability, Spread.

Welfare-improving debt constraints WELFARE-IMPROVING DEBT CONSTRAINTS

Abstract. Under uniform impatience of preferences, assets in positive net supply are free of price bubbles for deflators that yield finite present values of wealth. However, this does not imply that equilibrium prices must coincide with present values of dividends. Indeed, if borrowing constraints become binding, asset prices must take into account the respective shadow prices. In this context, we analyze the widely studied case of an asset paying no dividends where loans are bounded by an explicit debt constraint. We prove that a positive asset price occurs at some node if and only debt constraints are binding at this node or at some future state of nature. Thus, binding debt constraints always induce frictions which create room for improving welfare by allowing money to have a role in transferring wealth across the event tree