What to Expect When Everyone is Expecting: Self-Fulfilling Expectations and Asset-Pricing Puzzles

46 Pages Posted: 13 Dec 2019

See all articles by Nicolae Garleanu

Nicolae Garleanu

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stavros Panageas

University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Date Written: September 27, 2019

Abstract

We study an economy without bubbles in which expectations about future discount rates can become self-fulfilling because asset valuations redistribute wealth across different investor cohorts. For such redistribution to take place, the wealth of arriving and existing cohorts must react differently to discount rates, and in addition only the existing agents be marginal in financial markets. The self-fulfilling nature of discount rate expectations means that the economy can address several well documented empirical asset pricing facts (excessive volatility, return predictability, low interest rate level and volatility), while all real quantities (aggregate consumption and dividend growth) are smooth.

Keywords: asset pricing, self-fulfilling expectations, sunspot equilibria, equity premium puzzle, excess volatility puzzle, inequality

JEL Classification: G01, G12

Suggested Citation

Garleanu, Nicolae Bogdan and Panageas, Stavros, What to Expect When Everyone is Expecting: Self-Fulfilling Expectations and Asset-Pricing Puzzles (September 27, 2019). Available at SSRN: https://ssrn.com/abstract=3494549 or http://dx.doi.org/10.2139/ssrn.3494549

Nicolae Bogdan Garleanu

University of California, Berkeley - Haas School of Business ( email )

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2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/garleanu

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Stavros Panageas (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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