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This paper examines asset markets in which the key distinguishing characteristic of the goods is that they can be purchased for resale. Although the distinction between consumption durables and non-durables is clear and universally recognized, less evident is whether asset re-tradability accounts for economic instability. Market instability is strongly associated with goods that can be re-traded; stability with those that are bought for consumptive use. We emphasize the centrality of asset re-tradability in financial theory through a reinterpretation of the fundamental theorem of asset pricing: an arbitrage-free asset market is a market in which there is no advantage to re-trade any asset holdings. This result illustrates the inherent nature of the no-trade problem of neoclassical finance and suggests exploration of a different framework when it comes to dealing with asset re-tradability and speculation. We develop a relatively simple model of speculative asset price dynamics that generates excess, fat-tailed, and clustered volatility, three well-established empirical properties of financial volatility.


ESI Working Paper 21-21



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