Endogenous participation risk in speculative markets
Challe, Edouard (2008), Endogenous participation risk in speculative markets, Journal of Economic Dynamics and Control, 32, 7, p. 2148–2164. http://dx.doi.org/10.1016/j.jedc.2007.09.016
TypeArticle accepté pour publication ou publié
Journal nameJournal of Economic Dynamics and Control
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Abstract (EN)This paper analyses the dynamic implications of an asset-pricing model with incomplete participation due to entry costs. It is shown that heterogeneity in entry costs can lead to the existence of multiple stochastic sunspot equilibria, whereby the number of agents in the market and asset prices fluctuate endogeneously over time in the absence of fundamental uncertainty. Such asset-price fluctuations occur despite the uniqueness of the deterministic equilibrium, and thus bear no link to the usual notion of steady-state indeterminacy. In addition to excess volatility, the equilibria exhibit predictable and conditionally heteroskedastic returns.
Subjects / KeywordsIncomplete participation; Self-fulfilling expectations; Asset price volatility
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