Document Type

Article

Publication Date

12-2021

Abstract

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.

Comments

ESI Working Paper 21-21

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