Self-Fulfilling Risk Panics: An Expected Utility Framework

27 Pages Posted: 28 Dec 2020 Last revised: 14 Apr 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) - Finance Area, Faculty of Business and Economics

Pengfei Wang

Peking University HSBC Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 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 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.

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Suggested Citation

Benhabib, Jess and Liu, Xuewen and Wang, Pengfei, Self-Fulfilling Risk Panics: An Expected Utility Framework (December 2020). NBER Working Paper No. w28284, NYU Stern School of Business Forthcoming, Available at SSRN: https://ssrn.com/abstract=3756316

Jess Benhabib (Contact Author)

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

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Xuewen Liu

University of Hong Kong (HKU) - Finance Area, Faculty of Business and Economics ( email )

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Pengfei Wang

Peking University HSBC Business School ( email )

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