Heterogeneous stock traders, endogenous bubbles, and economic fluctuations

Yiyao He

Finance Research Letters, 2022, vol. 47, issue PA

Abstract: The impact of stock market bubbles on the real economy has always been an important topic. By introducing heterogeneous transactions of behavioral economics into a standard dynamic stochastic general equilibrium (DSGE) model, this paper finds, first, that heterogeneous trading behaviors cause an endogenous stock bubble. Second, the endogenous inverted U-shaped bubble affects the real economy through the borrowing constraint channel, which causes an inverted U-shaped output and promotes the output to rise against the decline of the total factor productivity (TFP) shock. Third, the positive bubble and increasing bubble dominate in promoting the output and investment of the real economy.

Keywords: Heterogeneous traders; Endogenous bubble cycle; Economic fluctuations; Behavioral economics; DSGE model (search for similar items in EconPapers)
JEL-codes: D11 E32 E37 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pa:s1544612321005456

DOI: 10.1016/j.frl.2021.102607

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