 Endogenous second moments: A unified approach to fluctuations in risk, dispersion, and uncertaintyLudwig Straub and Robert Ulbricht Journal of Economic Theory, 2019, vol. 183, issue C, 625-660 Abstract: We explore a mechanism by which second moments—such as cross-sectional dispersions, risk, volatility, or uncertainty—naturally and endogenously fluctuate over time as nonlinear transformations of fundamentals. Specifically, we provide theoretical results that characterize second moments of transformed random variables when the underlying fundamentals are subject to distributional shifts that affect their means, but not their variances. We illustrate the usefulness of our results with a series of applications. Our main application concerns the cross-sectional dispersions of output, employment, and Solow residuals, which we show to become countercyclical if employment and capital are gross complements. The mechanism can account for a significant share of the empirical cyclicality patterns, without exogenous shocks to volatilities. In additional applications we use our theory to study endogenous fluctuations in the dispersion of MRPKs, in risk in security pricing, and in uncertainty in Bayesian inference problems. Keywords: Cross-sectional dispersion; Endogenous uncertainty; Monotone likelihood ratio property; Nonlinear transformations; Risk; Second moments (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:183:y:2019:i:c:p:625-660 DOI: 10.1016/j.jet.2019.07.007 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.