Gasoline Prices and the Used Automobile Market: A Rational Expectations Asset Price Approach

1986 ◽  
Vol 101 (2) ◽  
pp. 323 ◽  
Author(s):  
James A. Kahn
Keyword(s):  
Rational Expectations ◽  
Asset Price ◽  
Gasoline Prices ◽  
Automobile Market ◽  
Price Approach

The Micro and Macro of Managerial Beliefs

2020 ◽  
Author(s):  
Jose Maria Barrero
Keyword(s):  
Rational Expectations ◽  
Asset Price ◽  
Heterogeneous Firms ◽  
Adjustment Costs ◽  
Consumer Welfare ◽  
Sales Growth ◽  
Firm Level ◽  
Managerial Decisions ◽  
Managerial Beliefs ◽  
Growth Volatility

This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not over-optimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise (overconfident): they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications of these facts, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1 percent of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5 to 2.3 percent relative to the rational expectations equilibrium. These findings suggest overreaction may amplify asset-price and business cycle fluctuations.

INEFFICIENT BUBBLES AND EFFICIENT DRAWDOWNS IN FINANCIAL MARKETS

2020 ◽  
Vol 23 (07) ◽  
pp. 2050047 ◽  
Author(s):  
MICHAEL SCHATZ ◽  
DIDIER SORNETTE
Keyword(s):  
Rational Expectations ◽  
Rational Expectation ◽  
Asset Price ◽  
Theoretical Background ◽  
Local Martingale ◽  
Management Problem ◽  
Market Failures ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Hyman Minsky

At odds with the common “rational expectations” framework for bubbles, economists like Hyman Minsky, Charles Kindleberger and Robert Shiller have documented that irrational behavior, ambiguous information or certain limits to arbitrage are essential drivers for bubble phenomena and financial crises. Following this understanding that asset price bubbles are generated by market failures, we present a framework for explosive semimartingales that is based on the antagonistic combination of (i) an excessive, unstable pre-crash process and (ii) a drawdown starting at some random time. This unifying framework allows one to accommodate and compare many discrete and continuous time bubble models in the literature that feature such market inefficiencies. Moreover, it significantly extends the range of feasible asset price processes during times of financial speculation and frenzy and provides a strong theoretical background for future model design in financial and risk management problem settings. This conception of bubbles also allows us to elucidate the status of rational expectation bubbles, which, by design, suffer from the paradox that a rational market should not allow for misvaluation. While the discrete time case has been extensively discussed in the literature and is most criticized for its failure to comply with rational expectations equilibria, we argue that this carries over to the finite time “strict local martingale”-approach to bubbles.

Financial Market Integration in East Asia: Regional or Global?

2006 ◽  
Vol 5 (1) ◽  
pp. 73-89 ◽  
Author(s):  
Jongkyou Jeon ◽  
Yonghyup Oh ◽  
Doo Yong Yang
Keyword(s):  
East Asia ◽  
Financial Market ◽  
Regional Integration ◽  
Market Integration ◽  
Asset Price ◽  
The United States ◽  
Market Mechanism ◽  
Global Integration ◽  
Financial Market Integration ◽  
Price Approach

This paper investigates whether financial markets in East Asia are integrated with global markets or with each other.We use two approaches: a volume-based approach and an asset price approach. Our overall results suggest global integration of these markets rather than regional integration and that there is no anchor market in the region that would match the advanced markets such as the United States. Though global integration is not a force that competes with regional integration, there seems to be no strong sign of the creation of an effective financial market mechanism in East Asia.

CALCULATION, ADAPTATION AND RATIONAL EXPECTATIONS

1998 ◽  
Vol 2 (2) ◽  
pp. 156-182 ◽  
Author(s):  
George W. Evans ◽  
Garey Ramey
Keyword(s):  
Adaptive Learning ◽  
Rational Expectations ◽  
Structural Changes ◽  
Asset Price ◽  
Learning Rule ◽  
Calculation Algorithm ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Rapid Adjustment ◽  
Policy Shifts

We propose an active cognition approach to bounded rationality, in which agents use a calculation algorithm to improve on the forecasts provided by a purely adaptive learning rule such as least-squares learning. Agents' choices of calculation intensity depend on their estimates of the benefits of improved forecasts relative to calculation costs. Using an asset-pricing model, we show how more rapid adjustment to rational expectations and forward-looking behavior arise naturally when there are large anticipated structural changes such as policy shifts. We also give illustrative applications in which the severity of asset price bubbles and the intensity of hyperinflationary episodes are related to the cognitive ability of the agents.

scholarly journals Dynamic Noisy Rational Expectations Equilibrium With Insider Information

Econometrica ◽  
2020 ◽  
Vol 88 (6) ◽  
pp. 2697-2737
Author(s):  
Jerome Detemple ◽  
Marcel Rindisbacher ◽  
Scott Robertson
Keyword(s):  
Private Information ◽  
Rational Expectations ◽  
Absolute Risk ◽  
Asset Price ◽  
Public Information ◽  
Noise Traders ◽  
Insider Information ◽  
Special Cases ◽  
Non Gaussian ◽  
Partial Communication

We study equilibria in multi‐asset and multi‐agent continuous‐time economies with asymmetric information and bounded rational noise traders. We establish the existence of two equilibria. First, a full communication equilibrium where the informed agents' signal is disclosed to the market and static policies are optimal. Second, a partial communication equilibrium where the signal disclosed is affine in the informed and noise traders' signals, and dynamic policies are optimal. Here, information asymmetry creates demand for two public funds, as well as a dark pool where private information trades can be implemented. Markets are endogenously complete and equilibrium returns have a three factor structure with stochastic factors and loadings. Results are valid for constant absolute risk averse investors, general vector diffusions for fundamentals, nonlinear terminal payoffs, and non‐Gaussian noise trading. Asset price dynamics and public information flows are endogenous, and rational expectations equilibria are special cases of the general results.

scholarly journals Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations

2021 ◽  
Vol 13 (2) ◽  
pp. 121-167
Author(s):  
Jordi Galí
Keyword(s):  
Monetary Policy ◽  
Rational Expectations ◽  
Overlapping Generations ◽  
Asset Price ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Keynesian Model ◽  
Welfare Implications

I analyze an extension of the New Keynesian model that features overlapping generations of finitely lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model’s welfare implications. (JEL E12, E32, E44, E52, E63)

scholarly journals BOLHAS RACIONAIS, CICLO DE PREÇOS DE ATIVOS E RACIONALIDADE LIMITADA: UMA AVALIAÇÃO CRÍTICA DOS MODELOS NEOCLÁSSICOS DE BOLHAS ESPECULATIVAS

2009 ◽  
Vol 21 (40) ◽  
Author(s):  
José Luís Oreiro
Keyword(s):  
Bounded Rationality ◽  
Rational Expectations ◽  
Multiple Equilibria ◽  
Asset Price ◽  
Complete Information ◽  
Unified Framework ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Starting Point ◽  
Asset Price Cycles

The objective of this article is to criticize neoclassical models of asset price bubbles and to argue that a general theory of asset price cycles demands the substitution of rational expectations hypothesis for bounded rationality assumption. In order to do that we will initially present the two neoclassical approaches for the problem of asset price bubbles. The first one, based on models of multiple equilibria with rational expectations, take financial markets as competitive and investors's behavior as based on perfect and complete information. In this setting, asset bubbles are a logically possible but unprobable phenomenon since their ocurrence will be associated with problems of dynamic ineficience which are not a relevant problem for most of capitalist economies. The second approach, initially developed by Krugman, take as a starting point the idea that financial market are far from perfect. In fact, these markets have a great number of imperfections as, for example, moral hazard. In this approach, asset price bubbles are the result of trading in assets with low supply-price elasticity as, for example, equities and land. Although this second approach is more realistic than the first, it is not capable to explain in a unified framework the appearance, propagation and burst of the speculative bubble; i.e the phenomenon of asset price cycles. This second approach is only capable to show the conditions for the existence of an asset bubble; but it is not capable to explain the dynamic evolution of the bubble. This question is better adressed by heterodox literature based on the hypothesis of bounded rationality.

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