Self-Fulfilling Risk Panics: An Expected Utility Framework
26 Pages Posted: 21 Jan 2021
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Self-Fulfilling Risk Panics: An Expected Utility Framework
NYU Stern School of Business Forthcoming
Number of pages: 26
Posted: 21 Jan 2021
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Self-Fulfilling Risk Panics: An Expected Utility Framework
NBER Working Paper No. w28284, NYU Stern School of Business Forthcoming
Number of pages: 27
Posted: 28 Dec 2020
Last Revised: 14 Apr 2023
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Date Written: December 19, 2020
Abstract
Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known unique fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions within an OLG structure. Our paper further shows that the existence of sentiment-driven equilibria is robust in a standard infinite-period model as long as the pricing kernel is affected by the asset price.
JEL Classification: E44, G01, G11, G12
Suggested Citation: Suggested Citation
Benhabib, Jess and Liu, Xuewen and Wang, Pengfei, Self-Fulfilling Risk Panics: An Expected Utility Framework (December 19, 2020). NYU Stern School of Business Forthcoming, Available at SSRN: https://ssrn.com/abstract=3751813 or http://dx.doi.org/10.2139/ssrn.3751813
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