We propose a continuous-time model of trading with heterogeneous beliefs. Risk-neutral agents face quadratic costs-of-carry on positions and thus their marginal valuations decrease with the size of their position, as it would be the case for risk-averse agents. In the equilibrium models of heterogeneous beliefs that followed Harrison--Kreps, investors are risk-neutral, short-selling is prohibited and agents face constant marginal costs of carrying positions. The resulting resale option guarantees that the price exceeds the price of the asset when speculation is ruled out; the difference is identified as a bubble. In our model increasing marginal costs entail that the price depends on asset supply. Second, agents also value an option to delay, and this may cause the market to equilibrate below the buy-and-hold price. Third, we introduce the possibility of short-selling. A Hamilton--Jacobi--Bellman equation of a novel form quantifies precisely the influence of the costs-of-carry on the price. An unexpected decrease in shorting costs may lead to the collapse of a bubble; this links the financial innovations that facilitated shorting of MBSs to the subsequent collapse of prices.

Bio

José A. Scheinkman is the Charles and Lynn Zhang Professor of Economics at Columbia University, Theodore A. Wells '29 Professor of Economics (emeritus) at Princeton University and a Research Associate at the NBER. Previously, Scheinkman was the Alvin H. Baum Distinguished Service Professor and Chairman of the Department of Economics at the University of Chicago, Blaise Pascal Research Professor (France), Visiting Professor at Collège de France and Vice President in the Financial Strategies Group of Goldman, Sachs. Scheinkman is a Member of the National Academy of Sciences, Fellow of the American Academy of Arts and Sciences, Fellow of the American Finance Association, Corresponding Member of the Brazilian Academy of Sciences, and recipient of a John Simon Guggenheim Memorial Fellowship and a "doctorat honoris causa" from the Université Paris-Dauphine. In 2014 he was awarded the CME Group-MSRI Prize in Innovative Quantitative Applications.

His research has focused in building mathematical models that shed light on a variety of economic and social phenomena such as economic fluctuations, the nature of oligopolistic competition, the growth of cities, informal economic activity, the spatial distribution of crime, the dynamics of asset prices and asset-price bubbles.