Incomplete markets over an infinite horizon: Long-lived securities and speculative bub

This paper studies sequence economies over an infinite horizon with general security structures. Assumptions are given under which a pseudo-equilibrium exists for all economies and an equilibrium exists for a dense set of (appropriately parameterized) economies. Under these assumptions the indebtedness of the agents in equilibrium can be limited either by an explicit bound on their debts or by a transversality condition limiting the asymptotic growth of their debts. The qualitative properties of equilibrium prices of infinite-lived securities are studied: the prices of infinite-lived securities in zero net supply are shown to permit speculative bubbles and the existence of bubbles can affect the equilibrium allocation. The prices of securities in positive supply (equity contracts) cannot have speculative bubbles: the extent of speculation in this class of model is thus severely limited. JEL classijkation: D52