Paper #225

Title:

Constraints and non-existence of rational expectations equilibria

Authors:

José M. Marín and Jacques Olivier

Date:

July 1997

Abstract:

In this article we show that in the presence of trading constraints, such as short sale constraints, the standard definition of a Rational Expectations Equilibrium allows for equilibrium prices that reveal information unknown to any active trader in the market. We propose a new definition of the Rational Expectations Equilibrium that incorporates a stronger measurability condition than measurability with respect to the join of the information sets of the agents and give an example of non-existence of equilibrium. The example is robust to perturbations on the data of the economy and the introduction of new assets.

Keywords:

Rational expectations, short sale constraints, existence of equilibrium

JEL codes:

D40, D46, D50, D82, G12

Area of Research:

Finance and Accounting

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