The anatomy of sentiment-driven fluctuations

Sushant Acharya, Jess Benhabib and Zhen Huo

Journal of Economic Theory, 2021, vol. 195, issue C

Abstract: We show that sentiments - self-fulfilling changes in beliefs that are orthogonal to fundamentals - can drive persistent aggregate fluctuations under rational expectations in a beauty-contest game. Such fluctuations can occur even in the absence of exogenous aggregate fundamental shocks. Moreover, sentiments alter the volatility and persistence of aggregate outcomes in response to fundamental shocks. We provide (i) necessary conditions under which sentiments can affect aggregate outcomes in equilibrium and (ii) conditions under which sentiments drive persistent fluctuations and when they only affect aggregate outcomes contemporaneously. We also show that sentiment equilibria are stable under least-squares learning while the fundamental equilibrium is not.

Keywords: Sentiments; Endogenous information; Dynamic signal extraction (search for similar items in EconPapers)
JEL-codes: E20 E32 F44 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: The Anatomy of Sentiment-Driven Fluctuations (2021)
Working Paper: The Anatomy of Sentiment-Driven Fluctuations (2017)
Working Paper: The Anatomy of Sentiment-driven Fluctuations (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:195:y:2021:i:c:s0022053121000971

DOI: 10.1016/j.jet.2021.105280

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