Self-Fulfilling Risk Panics: An Expected Utility Framework
26 Pages Posted: 21 Jan 2021
Date Written: December 19, 2020
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