Speculation, Trading, and Bubbles by José A. Scheinkman

Author:José A. Scheinkman
Language: eng
Format: epub
Tags: -
Publisher: Columbia University Press
Published: 2014-05-19T16:00:00+00:00

and that when the capital constraints bind, they are strong enough, that is:

Equation (13) guarantees that if supply does not increase in period 2, S2 = S and the signal observed in period 3 s3 = 2, the demand by group B agents will drive the price of the asset in period 3 to and thus exceed the expected “rational” payoff in period 3. Inequality (14) insures that if S2 increases to S + ΔS, the price of the asset in period 3 will equal the (discounted) average payoff expected by rational agents, since a member of group A would necessarily be the marginal buyer of the asset.4

Thus when S2 = S, the price in period 3 matches exactly the price when there are no capital constraints, whereas when S2 = S + ΔS the price in period 3 equals the valuation of the rational agents, independent of the signal. In particular, if the supply of the asset increases in period 2 because of sales by insiders, that is S2 = S + ΔS, there is no period 2 bubble, since it is known that period 3 prices are independent of the signal s3 that is observed. On the other hand, if supply of the asset does not increase in period 2, then, as in the case of no capital constraints,

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