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Asset price volatility in a nonconvex general equilibrium model

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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)

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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Bibliographic 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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Related research

Keywords: Private information · Costly state verification · Asset price volatility · Cycles.;

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Cited by:
  1. Challe, Edouard, 2008. "Endogenous participation risk in speculative markets," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2148-2164, July.
  2. Cooper, Russell & Corbae, Dean, 2002. "Financial Collapse: A Lesson from the Great Depression," Journal of Economic Theory, Elsevier, vol. 107(2), pages 159-190, December.
  3. Challe, Edouard, 2004. "Sunspots and predictable asset returns," Journal of Economic Theory, Elsevier, vol. 115(1), pages 182-190, March.
  4. Shi, Lisi & Suen, Richard M. H., 2013. "Asset Bubbles in an Overlapping Generations Model with Endogenous Labor Supply," MPRA Paper 48835, University Library of Munich, Germany.
  5. 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.
  6. 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.

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