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Restrictions On Asset Price Movements Under Rational Expectations
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Book Synopsis Restrictions on Asset-Price Movements Under Rational Expectations by : Ned Augenblick
Download or read book Restrictions on Asset-Price Movements Under Rational Expectations written by Ned Augenblick and published by . This book was released on 2019 with total page 83 pages. Available in PDF, EPUB and Kindle. Book excerpt: How restrictive is the assumption of rational expectations in asset markets? We provide two contributions to address this question. First, we derive restrictions on the admissible variation in asset prices in a general class of rational-expectations equilibria. The challenge in this task is that asset prices reflect both beliefs and preferences. We gain traction by considering market-implied, or risk-neutral, probabilities of future outcomes, and we provide a mapping between the variation in these probabilities and the minimum curvature of utility -- or, more generally, the slope of the stochastic discount factor -- required to rationalize the marginal investor's beliefs. Second, we implement these bounds empirically using S&P 500 index options. We find that very high utility curvature is required to rationalize the behavior of risk-neutral beliefs, and in some cases, no stochastic discount factor in the class we consider is capable of rationalizing these beliefs. This provides evidence of overreaction to new information relative to the rational benchmark. We show further that this overreaction is strongest for beliefs over prices at distant horizons, and that our findings cannot be explained by factors specific to the option market.
Book Synopsis A Rational Expectations Approach to Macroeconometrics by : Frederic S. Mishkin
Download or read book A Rational Expectations Approach to Macroeconometrics written by Frederic S. Mishkin and published by University of Chicago Press. This book was released on 2007-11-01 with total page 184 pages. Available in PDF, EPUB and Kindle. Book excerpt: A Rational Expectations Approach to Macroeconometrics pursues a rational expectations approach to the estimation of a class of models widely discussed in the macroeconomics and finance literature: those which emphasize the effects from unanticipated, rather than anticipated, movements in variables. In this volume, Fredrick S. Mishkin first theoretically develops and discusses a unified econometric treatment of these models and then shows how to estimate them with an annotated computer program.
Book Synopsis Asset Pricing Bubbles Under Rational Expectations by : Sebastian Seidens
Download or read book Asset Pricing Bubbles Under Rational Expectations written by Sebastian Seidens and published by . This book was released on 2018 with total page 12 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Efficiency Market Hypotheses (EMH) imply rational investors and no asset mispricing in the medium run. This paper critically evaluates on the point of whether an asset price bubble is an irrational phenomenon that cannot be detected. Thereby, I review the existing literature and reflect on asset pricing tests to detect bubbles. I show that the emergence of rational bubbles within the EMH framework is indeed possible as long as a number of assumptions is not violated. As researchers show, these assumption do not hold in practice, which means that rational bubbles can be ruled out. Thus, a bubbles is always an irrational phenomenon that can be explained with behavioural models such as feedback trading and herding. This implies that EMH does not hold. Hence, irrational bubbles can only emerge in inefficient markets. Models trying to detect bubbles fail to identify the existence of bubbles ex ante and ex interim. Ex post, they can prove that a bubble had existed.
Book Synopsis Beyond Mechanical Markets by : Roman Frydman
Download or read book Beyond Mechanical Markets written by Roman Frydman and published by Princeton University Press. This book was released on 2011-02-07 with total page 304 pages. Available in PDF, EPUB and Kindle. Book excerpt: A powerful challenge to contemporary economics and a new agenda for global finance In the wake of the global financial crisis that began in 2007, faith in the rationality of markets has lost ground to a new faith in their irrationality. The problem, Roman Frydman and Michael Goldberg argue, is that both the rational and behavioral theories of the market rest on the same fatal assumption—that markets act mechanically and economic change is fully predictable. In Beyond Mechanical Markets, Frydman and Goldberg show how the failure to abandon this assumption hinders our understanding of how markets work, why price swings help allocate capital to worthy companies, and what role government can and can't play. The financial crisis, Frydman and Goldberg argue, was made more likely, if not inevitable, by contemporary economic theory, yet its core tenets remain unchanged today. In response, the authors show how imperfect knowledge economics, an approach they pioneered, provides a better understanding of markets and the financial crisis. Frydman and Goldberg deliver a withering critique of the widely accepted view that the boom in equity prices that ended in 2007 was a bubble fueled by herd psychology. They argue, instead, that price swings are driven by individuals' ever-imperfect interpretations of the significance of economic fundamentals for future prices and risk. Because swings are at the heart of a dynamic economy, reforms should aim only to curb their excesses. Showing why we are being dangerously led astray by thinking of markets as predictably rational or irrational, Beyond Mechanical Markets presents a powerful challenge to conventional economic wisdom that we can't afford to ignore.
Book Synopsis Asset Price Volatility and Trading Volume with Rational Beliefs by : Ho-Mou Wu
Download or read book Asset Price Volatility and Trading Volume with Rational Beliefs written by Ho-Mou Wu and published by . This book was released on 2008 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a model of speculative trading in a large economy with a continuum of investors. In our model the investors are assumed to have diverse beliefs which are rational in the sense of being compatible with observed data.We demonstrate the existence of price amplification effects and show that the equilibrium prices can be higher or lower than the rational expectation equilibrium price. It is also shown that trading volume is positively related to the directions of price changes. Moreover, we study how asset price volatility and trading volume are influenced by belief structures, short selling constraints and the amount of fund available for investment.
Book Synopsis Asset Prices and Monetary Policy by : John Y. Campbell
Download or read book Asset Prices and Monetary Policy written by John Y. Campbell and published by University of Chicago Press. This book was released on 2008-11-15 with total page 444 pages. Available in PDF, EPUB and Kindle. Book excerpt: Economic growth, low inflation, and financial stability are among the most important goals of policy makers, and central banks such as the Federal Reserve are key institutions for achieving these goals. In Asset Prices and Monetary Policy, leading scholars and practitioners probe the interaction of central banks, asset markets, and the general economy to forge a new understanding of the challenges facing policy makers as they manage an increasingly complex economic system. The contributors examine how central bankers determine their policy prescriptions with reference to the fluctuating housing market, the balance of debt and credit, changing beliefs of investors, the level of commodity prices, and other factors. At a time when the public has never been more involved in stocks, retirement funds, and real estate investment, this insightful book will be useful to all those concerned with the current state of the economy.
Book Synopsis Computational Methods for the Study of Dynamic Economies by : Ramon Marimon
Download or read book Computational Methods for the Study of Dynamic Economies written by Ramon Marimon and published by OUP Oxford. This book was released on 1999-03-04 with total page 298 pages. Available in PDF, EPUB and Kindle. Book excerpt: Macroeconomics increasingly uses stochastic dynamic general equilibrium models to understand theoretical and policy issues. Unless very strong assumptions are made, understanding the properties of particular models requires solving the model using a computer. This volume brings together leading contributors in the field who explain in detail how to implement the computational techniques needed to solve dynamic economics models. A broad spread of techniques are covered, and their application in a wide range of subjects discussed. The book provides the basics of a toolkit which researchers and graduate students can use to solve and analyse their own theoretical models.
Book Synopsis Stock Prices and Monetary Policy by : Paul De Grauwe
Download or read book Stock Prices and Monetary Policy written by Paul De Grauwe and published by CEPS. This book was released on 2008 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: The question of whether central banks should target stock prices so as to prevent bubbles and crashes from occurring has been hotly debated. This paper analyses this question using a behavioural macroeconomic model. This model generates bubbles and crashes. It analyses how 'leaning against the wind' strategies, which aim to reduce the volatility of stock prices, can help in reducing volatility of output and inflation. We find that such policies can be effective in reducing macroeconomic volatility, thereby improving the trade-off between output and inflation variability. The strength of this result, however, depends on the degree of credibility of the inflation-targeting regime. In the absence of such credibility, policies aiming at stabilising stock prices do not stabilise output and inflation.
Book Synopsis Asset Pricing in an Intertemporal Noisy Rational Expectations Equilibrium by : Jérôme Detemple
Download or read book Asset Pricing in an Intertemporal Noisy Rational Expectations Equilibrium written by Jérôme Detemple and published by . This book was released on 1995 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Securities Trading Under Asymmetric Information and Trading Constraints by : Kathy Yuan
Download or read book Securities Trading Under Asymmetric Information and Trading Constraints written by Kathy Yuan and published by . This book was released on 2005 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a non-linear rational expectations equilibrium (REE) solution for a class of economies under both asymmetric information and trading constraints. It then analyzes the properties of this equilibrium in a one-risky-asset economy with borrowing and shortsale constraints. The model suggests that 1) price informativeness varies with the price level; and 2) compared with an economy with borrowing constraints and information asymmetry, the asymmetry in large price movements is more pronounced in the presence of both constraints. A dynamic implication of this result is that crashes (large downward price movements) are formed much faster than bubbles (large upward price movements).
Book Synopsis Rational Expectations Equilibrium in a Market with Restricted Access to Differential Information by : Belinda Ann Brewer Gillette
Download or read book Rational Expectations Equilibrium in a Market with Restricted Access to Differential Information written by Belinda Ann Brewer Gillette and published by . This book was released on 1991 with total page 218 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Departures from Rational Expectations and Asset Pricing Anomalies by : Andrei Semenov
Download or read book Departures from Rational Expectations and Asset Pricing Anomalies written by Andrei Semenov and published by . This book was released on 2008 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the potential of the consumption CAPM with pessimism, doubt, and the availability heuristic in the agent's beliefs to resolve the equity premium and risk-free rate puzzles. Using the nonlinear GMM estimation techniques, we find that doubt and the availability heuristic play an important role in explaining the cross-section of asset returns. However, when taken alone, these deviations from rational expectations can not resolve the equity premium and risk-free rate puzzles. This result is robust to the assumption that the expected value of an uncertain prospect is nonlinear in the subjective outcome probabilities.
Book Synopsis Reduced Forms of Rational Expectations Models by : L. Broze
Download or read book Reduced Forms of Rational Expectations Models written by L. Broze and published by Routledge. This book was released on 2013-06-17 with total page 134 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive exposition of rational expectations models is provided here, working up from simple univariate models to more sophisticated multivariate and non-linear models.
Book Synopsis Asset Pricing Theory by : Costis Skiadas
Download or read book Asset Pricing Theory written by Costis Skiadas and published by Princeton University Press. This book was released on 2009-02-09 with total page 363 pages. Available in PDF, EPUB and Kindle. Book excerpt: Asset Pricing Theory is an advanced textbook for doctoral students and researchers that offers a modern introduction to the theoretical and methodological foundations of competitive asset pricing. Costis Skiadas develops in depth the fundamentals of arbitrage pricing, mean-variance analysis, equilibrium pricing, and optimal consumption/portfolio choice in discrete settings, but with emphasis on geometric and martingale methods that facilitate an effortless transition to the more advanced continuous-time theory. Among the book's many innovations are its use of recursive utility as the benchmark representation of dynamic preferences, and an associated theory of equilibrium pricing and optimal portfolio choice that goes beyond the existing literature. Asset Pricing Theory is complete with extensive exercises at the end of every chapter and comprehensive mathematical appendixes, making this book a self-contained resource for graduate students and academic researchers, as well as mathematically sophisticated practitioners seeking a deeper understanding of concepts and methods on which practical models are built. Covers in depth the modern theoretical foundations of competitive asset pricing and consumption/portfolio choice Uses recursive utility as the benchmark preference representation in dynamic settings Sets the foundations for advanced modeling using geometric arguments and martingale methodology Features self-contained mathematical appendixes Includes extensive end-of-chapter exercises
Book Synopsis Rational Expectations, Market Fundamentals and Housing Price Volatility by : Jim Clayton
Download or read book Rational Expectations, Market Fundamentals and Housing Price Volatility written by Jim Clayton and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper derives a forward-looking rational expectations house price model and empirically tests its ability to explain short-run fluctuations in real house prices. A novel approach to proxying the imputed rents of owner-occupied housing, as a function of observable housing market fundamentals, is derived and combined with a housing market arbitrage relation to derive a present value model for real house prices. Tests of the rational expectations, nonlinear cross-equation restrictions reject the joint null hypothesis of rational expectations and the asset-based housing price model for quarterly, single-detached house prices in the city of Vancouver, British Columbia, over the 1979-1991 sample period. The model fails to fully capture observed house price dynamics in two real estate booms but tracks real house prices well in less volatile times, suggesting that prices may temporarily deviate from fundamental values in real estate price cycles.
Book Synopsis Dynamic Asset-pricing Models by : Andrew Wen-Chuan Lo
Download or read book Dynamic Asset-pricing Models written by Andrew Wen-Chuan Lo and published by Edward Elgar Publishing. This book was released on 2007 with total page 680 pages. Available in PDF, EPUB and Kindle. Book excerpt: Presents a selection of the most important articles in the field of financial econometrics. Starting with a review of the philosophical background, this collection covers such topics as the random walk hypothesis, long-memory processes, asset pricing, arbitrage pricing theory, variance bounds tests, term structure models, and more.
Book Synopsis Optimal Macroprudential Policy and Asset Price Bubbles by : Nina Biljanovska
Download or read book Optimal Macroprudential Policy and Asset Price Bubbles written by Nina Biljanovska and published by International Monetary Fund. This book was released on 2019-08-30 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.
