WP 2014-02 Portfolio Constraints, Differences in Beliefs and Bubbles

AUTHOR: Florin Bidian

ABSTRACT. I propose an arbitrage-based theory of rational bubbles in economies with general portfolio constraints and differences in beliefs. Trading restrictions and speculation due to asymmetric information and heterogeneous beliefs do not cause bubbles. Low interest rates are again needed for bubbles to exist, as in economies with symmetric information and agents subject to borrowing constraints (Santos and Woodford 1997).