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Endogenous participation risk in speculative markets

  • Challe, Edouard

This paper analyses the dynamic implications of an asset-pricing model with incomplete participation due to entry costs. It is shown that heterogeneity in entry costs can lead to the existence of multiple stochastic sunspot equilibria, whereby the number of agents in the market and asset prices fluctuate endogeneously over time in the absence of fundamental uncertainty. Such asset-price fluctuations occur despite the uniqueness of the deterministic equilibrium, and thus bear no link to the usual notion of steady-state indeterminacy. In addition to excess volatility, the equilibria exhibit predictable and conditionally heteroskedastic returns.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165-1889(07)00221-7
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 7 (July)
Pages: 2148-2164

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:7:p:2148-2164
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
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  3. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
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  15. Challe, Edouard, 2004. "Sunspots and predictable asset returns," Journal of Economic Theory, Elsevier, vol. 115(1), pages 182-190, March.
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  18. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
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  20. repec:dau:papers:123456789/2739 is not listed on IDEAS
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  23. Engle III, Robert F., 2003. "Risk and Volatility: Econometric Models and Financial Practice," Nobel Prize in Economics documents 2003-4, Nobel Prize Committee.
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