Self-fulfilling Asset Pricing

Alexander Zentefis
Additional contact information
Alexander Zentefis: Yale University

No 747, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: I develop an asset pricing model and show that collateral constraints that are common to the literature—ones that guarantee no loan loss—can generate multiple equilibria in a dynamic rational expectations economy. In the model, expectations of the future value of collateral affect leverage and thus investor demand for assets. High expected collateral value implies high leverage and hence high asset prices, which confirms the initial beliefs. And conversely for low collateral value. As a consequence, asset prices can be self-fulfilling. Price crashes and booms, excess volatility, long price recoveries, price overshooting and misfiring, as well as leverage cycles transpire purely from shifts in investor expectations without corresponding shifts in fundamentals (i.e., from sentiments).

Date: 2019
New Economics Papers: this item is included in nep-dge and nep-ure
References: Add references at CitEc
Citations:

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2019/paper_747.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:747

Access Statistics for this paper

More papers in 2019 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().