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Heterogeneous stock traders, endogenous bubbles, and economic fluctuations

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  • He, Yiyao

Abstract

The impact of stock market bubbles on the real economy has always been an important topic. By introducing heterogeneous transactions of behavioral economics into a standard dynamic stochastic general equilibrium (DSGE) model, this paper finds, first, that heterogeneous trading behaviors cause an endogenous stock bubble. Second, the endogenous inverted U-shaped bubble affects the real economy through the borrowing constraint channel, which causes an inverted U-shaped output and promotes the output to rise against the decline of the total factor productivity (TFP) shock. Third, the positive bubble and increasing bubble dominate in promoting the output and investment of the real economy.

Suggested Citation

  • He, Yiyao, 2022. "Heterogeneous stock traders, endogenous bubbles, and economic fluctuations," Finance Research Letters, Elsevier, vol. 47(PA).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pa:s1544612321005456
    DOI: 10.1016/j.frl.2021.102607
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    More about this item

    Keywords

    Heterogeneous traders; Endogenous bubble cycle; Economic fluctuations; Behavioral economics; DSGE model;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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