Working Paper: NBER ID: w28284
Authors: Jess Benhabib; Xuewen Liu; Pengfei Wang
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 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.
Keywords: Sentiment-driven equilibria; Asset pricing; Self-fulfilling risk panics; Overlapping generations model
JEL Codes: E44; G01; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agents' beliefs about risk (D80) | asset prices (G19) |
| sunspots (E32) | demand for risk compensation (D11) |
| demand for risk compensation (D11) | rational self-fulfilling expectation equilibrium (D84) |
| sunspot (st) (E32) | asset price (qt) (G19) |
| asset price (qt) (G19) | endogenous price crashes (E30) |
| sentiment-driven equilibria (D50) | asset pricing (G19) |
| asset prices (G19) | consumption (E21) |
| agents' risk perceptions (D80) | asset prices (G19) |