What to Expect when Everyone is Expecting: Self-Fulfilling Expectations and Asset-Pricing Puzzles
نویسندگان
چکیده
We construct equilibria of continuous-time, overlapping generations economies whereby interest rates and asset prices affect the distribution of wealth and consumption between existing and arriving cohorts of investors. Such economies are prone to self-fulfilling expectations and a multitude of equilibria; anticipations of future discount rates impact asset prices and the wealth distribution, causing savings and investment responses that end up confirming the discount rate anticipations. Extrinsic uncertainty caused by shifts in expectations about the prevailing equilibrium imply volatility that is entirely disconnected from “fundamentals.” Moreover, this volatility implies a non-trivial risk premium for stocks even in a world where aggregate consumption follows a deterministic time trend and investors have standard recursive preferences with only moderate degrees of risk aversion.
منابع مشابه
Experiments on the Lucas Asset Pricing Model∗
This paper reports on experimental tests of the Lucas asset pricing model with heterogeneous agents and time-varying (individual) endowment streams. In order to emulate key features of the model (infinite horizon, stationarity, perishability of consumption), a novel experimental design was required. The experimental evidence provides broad support for the cross-sectional, inter-temporal pricing...
متن کاملAsset Pricing Under Endogenous Expectations in an Artificial Stock Market
We propose a theory of asset pricing based on heterogeneous agents who continually adapt their expectations to the market that these expectations aggregatively create. And we explore the implications of this theory computationally using our Santa Fe artificial stock market. Asset markets, we argue, have a recursive nature in that agents’ expectations are formed on the basis of their anticipatio...
متن کاملasset pricing anomalies at the firm level
Anomaly is deviation from common rules and in finance it can be defined as a pattern in the average of stock return that is not consistent with the prevailing asset pricing models literature. For anomaly investigation two common methods are used: portfolio approach and individual firm approach. This paper wants to shed light on anomalies of capital asset pricing model at the individual firm lev...
متن کاملHigher moments portfolio Optimization with unequal weights based on Generalized Capital Asset pricing model with independent and identically asymmetric Power Distribution
The main criterion in investment decisions is to maximize the investors utility. Traditional capital asset pricing models cannot be used when asset returns do not follow a normal distribution. For this reason, we use capital asset pricing model with independent and identically asymmetric power distributed (CAPM-IIAPD) and capital asset pricing model with asymmetric independent and identically a...
متن کاملIncomplete Markets and Security Prices: Do Asset-Pricing Puzzles Result from Aggregation Problems?
This paper investigates Euler equations involving security prices and household-level consumption data. It provides a useful complement to many existing studies of consumptionbased asset pricing models that use a representative-agent framework, because the Euler equations under investigation hold even if markets are incomplete. It also provides a useful complement to simulation-based studies of...
متن کامل