Asset Price Volatility in a Nonconvex General Equilibrium Model

Posted: 25 Oct 1998

See all articles by Costas Azariadis

Costas Azariadis

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Shankha Chakraborty

University of Oregon - Department of Economics

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.

JEL Classification: E32, E44, G12, G14

Suggested Citation

Azariadis, Costas and Chakraborty, Shankha, Asset Price Volatility in a Nonconvex General Equilibrium Model. Economic Theory, Vol. 12, Issue 3, 1998. Available at SSRN: https://ssrn.com/abstract=137424

Costas Azariadis

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Shankha Chakraborty (Contact Author)

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States
541-346-4678 (Phone)

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