Bubbles and multiplicity of equilibria under portfolio constraints

This article shows that, as long as agents are required to maintain positive wealth, the presence of portfolio constraints may give rise to asset pricing bubbles in equilibrium even if there are unconstrained agents in the economy who can benefit from the induced arbitrage opportunity. Furthermore, it is shown that the presence of bubbles in the aggregate price system can lead to both multiplicity and real indeterminacy of equilibrium. The general results are illustrated by two explicitly solved examples where seemingly innocuous portfolio constraints make bubbles a necessary condition for the existence of an equilibrium.