R ≤ 11 ■ V
• ‘ ≤ β Ps, U-S-1)
for every security j as above. The right-hand side of Inequality (B) depends
on the parameters described in Proposition 3, together with the intertemporal
discount factor β and the coefficient of risk-aversion α. This last inequality
directly yields the numerical simulations presented in Section 4.
References
[1] Allen, F., Morris, S., and H.Y. Shin, 2005, “Beauty contests and bub-
bles,” forthcoming in Review of Financial Studies.
[2] Araujo, A., and A. Sandroni, A. (1999) “On the Convergence to Homo-
geneous Expectations when Markets are Complete,” Econometrica, 67,
663-672.
[3] Hong, H., and J. Stein (2003) “Differences in Opinion, Short-Sales Con-
straints and Market Crashes,” Review of Financial Studies, 16, 487-525.
[4] Hernandez, A., and M. Santos (1996) “Competitive Equilibria for
Infinite-horizon Economies with Incomplete Markets, Journal of Eco-
nomic Theory, 71, 102-130.
[5] Lee, I. H. (1998) “Market crashes and informational avalanches,” Review
of Economic Studies, 4, 741-759.
22
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