Asset price volatility in a nonconvex general equilibrium model

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Asset price volatility in a nonconvex general equilibrium model

Author Info

Costas Azariadis () (Department of Economics, UCLA, Los Angeles, CA 90095-1477, USA)
Shankha Chakraborty () (Department of Economics, UCLA, Los Angeles, CA 90095-1477, USA)

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Abstract

Asset prices and returns are known to vary significantly more than output or aggregate consumption growth, and an order of magnitude in excess of what is justified by innovations to fundamentals. We study excess price volatility in a lifecycle economy with two assets (claims on capital and a public debt bubble), heterogeneous agents, and increasing returns to financial intermediation. We show that a relatively modest nonconvexity generates a set valued equilibrium correspondence in asset prices, with two stable branches. Price volatility is the outcome of an equilibrium selection mechanism, which mixes adaptive learning with "noise", and alternates stochastically between the two stable branches of the price correspondence.

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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 12 (1998)
Issue (Month): 3 ()
Pages: 649-665
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Handle: RePEc:spr:joecth:v:12:y:1998:i:3:p:649-665

Note: Received: March 19, 1998; revised version: June 2, 1998
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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Edouard Challe, 2005. "Endogenous Participation Rick in Speculative Markets," Money Macro and Finance (MMF) Research Group Conference 2005 90, Money Macro and Finance Research Group. [Downloadable!]
Russell Cooper & Dean Corbae, 2001. "Financial collapse and active monetary policy: a lesson from the Great Depression," Staff Report 289, Federal Reserve Bank of Minneapolis. [Downloadable!]

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