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Asset price volatility in a nonconvex general equilibrium model

Author

Listed:
  • 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.

Suggested Citation

  • Costas Azariadis & Shankha Chakraborty, 1998. "Asset price volatility in a nonconvex general equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(3), pages 649-665.
  • 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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    Citations

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    Cited by:

    1. Challe, Edouard, 2004. "Sunspots and predictable asset returns," Journal of Economic Theory, Elsevier, vol. 115(1), pages 182-190, March.
    2. Challe, Edouard, 2008. "Endogenous participation risk in speculative markets," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2148-2164, July.
    3. repec:dau:papers:123456789/12877 is not listed on IDEAS
    4. Russell W. Cooper & Dean Corbae, 2001. "Financial collapse and active monetary policy: a lesson from the Great Depression," Staff Report 289, Federal Reserve Bank of Minneapolis.
    5. Stodder, James, 2009. "Complementary credit networks and macroeconomic stability: Switzerland's Wirtschaftsring," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 79-95, October.
    6. Shi, Lisi & Suen, Richard M.H., 2014. "Asset bubbles in an overlapping generations model with endogenous labor supply," Economics Letters, Elsevier, vol. 123(2), pages 164-167.
    7. 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.

    More about this item

    Keywords

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

    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; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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