Non-falsified Expectations and General Equilibrium Asset Pricing: The Power of the Peso
AbstractWe discuss the extent to which the expectation of a rare event which happens not to materialise over the sample period, but which is not rationally excludable from the set of possibilities--the peso problem--can affect the behaviour of rational agents and the characteristics of market equilibrium. To that end we describe quantitatively the macroeconomic and financial properties of a standard equilibrium business cycle model modified to allow for a very small probability of a depression state. We produce a model specification for which both business cycle characteristics and mean financial returns are in accord with United States observations.
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Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 109 (1999)
Issue (Month): 458 (October)
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Other versions of this item:
- Danthine, Jean-Pierre & Donaldson, John B, 1998. "Non-Falsified Expectations and General Equilibrium Asset Pricing: The Power of the Peso," CEPR Discussion Papers 1819, C.E.P.R. Discussion Papers.
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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