Self-Fulfilling Risk Panics: An Expected Utility Framework

26 Pages Posted: 21 Jan 2021

See all articles by Jess Benhabib

Jess Benhabib

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Xuewen Liu

University of Hong Kong (HKU), HKU Business School

Pengfei Wang

Peking University HSBC Business School

Multiple version iconThere are 2 versions of this paper

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

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

Jess Benhabib

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Xuewen Liu

University of Hong Kong (HKU), HKU Business School ( email )

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Pengfei Wang (Contact Author)

Peking University HSBC Business School ( email )

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