Model Uncertainty and Endogenous Volatility
نویسندگان
چکیده
This paper identifies two channels through which the economy can generate endogenous inflation and output volatility, an empirical regularity, by introducing model uncertainty into a Lucas-type monetary model. The equilibrium path of inflation depends on agents’ expectations and a vector of exogenous random variables. Following Branch and Evans (2006a) agents are assumed to underparameterize their forecasting models. A Misspecification Equilibrium arises when beliefs are optimal, given the misspecification, and predictor proportions are based on relative forecast performance. We show that there may exist multiple Misspecification Equilibria, a subset of which are stable under least squares learning and dynamic predictor selection. The dual channels of least squares parameter updating and dynamic predictor selection combine to generate regime switching and endogenous volatility. JEL Classifications: C53; C62; D83; D84; E40
منابع مشابه
Option Prices with Uncertain Fundamentals Theory and Evidence on the Dynamics of Implied Volatilities
In an incomplete information model, investors' uncertainty about the underlying drift rate of a rm's fundamentals a ects option prices through (i) endogenous and belief-dependent stochastic volatility, (ii) stochastic covariance between returns and volatility, and (iii) a market price of \belief risk." For the special case where the drift takes only two values, we provide an option pricing form...
متن کاملRadner Equilibria under Ambiguous Volatility
The present paper considers a class of general equilibrium economies when the primitive uncertainty model features uncertainty about continuous-time volatility. This requires a set of mutually singular priors, which do not share the same null sets. For this setting we introduce an appropriate commodity space and the dual of linear and continuous price systems. All agents in the economy are hete...
متن کاملThe Relationship between Lifecycle and Idiosyncratic Volatility with Emphasis on Fundamental and Information Uncertainty of Firms listed on the TSE
According to the importance and the increasing trend of idiosyncratic volatility in recent years, the study of factors affecting idiosyncratic volatility is one of the important issues in financial markets. So, the purpose of this study is to investigate the relationship between lifecycle and idiosyncratic volatility with emphasis on fundamental and information uncertainty. In this regard, 152 ...
متن کاملUncertainty Shocks, Mean-Variance Frontiers, and Business Cycles∗
This paper constructs a model economy to explain how uncertainty shocks can cause business cycle fluctuations. In the model, during times of high uncertainty, the representative agent, due to risk aversion motives, moves resources from a high risk/high return production process to a low risk/low return production process. High uncertainty thus causes the firm level technology frontier to endoge...
متن کاملThe Effect of Uncertainty of Macroeconomic Indicators on Tehran Stock Exchange Return With an Approach of the TVP-SV Model
One of the most important duties of financial economy is modeling and forecasting the volatilities of price of risky assets. From analysts and policy makers’ view, price volatility is a key variable contributing to perception of market volatilities. Therefore, analysts need to have an appropriate of forecast of price volatility as a necessary input to perform duties such as risk management, por...
متن کامل