In this paper I consider a dynamically complete market model without intrinsic uncertainty. The only uncertainty is modelled by sunspots. Agents' beliefs are heterogeneous, but eventually become homogeneous in the sense that agents' beliefs are identical in the limit. I show that if some states of nature occur rarely then arbitrarily large market crashes may occur infinitely often. This result contrasts with Cass and Shell's (83) results which show that when beliefs are homogeneous, in complete markets without intrinsic uncertainty, sunspots do not matter.
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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number
1199.
Length: Date of creation: Nov 1997 Date of revision: Handle: RePEc:nwu:cmsems:1199
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Find related papers by JEL classification: D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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