Asset price volatility in a nonconvex general equilibrium model
AbstractAsset 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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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 12 (1998)
Issue (Month): 3 ()
Note: Received: March 19, 1998; revised version: June 2, 1998
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
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
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