Disagreement, speculation, and aggregate investment

Steven D. Baker, Burton Hollifield and Emilio Osambela

Journal of Financial Economics, 2016, vol. 119, issue 1, 210-225

Abstract: When investors disagree, speculation between them alters equilibrium prices in financial markets. Because managers maximize firm value given financial market prices, disagreement alters firms' value-maximizing investment policies. Disagreement therefore impacts aggregate investment, consumption, and output. In a production economy with recursive preferences and disasters, we demonstrate that static disagreement among investors generates dynamic aggregate investment that is positively correlated with capital shocks, leading to stochastic volatility in aggregate consumption, investment, and equity returns. The direction of these effects is consistent with business cycle facts, and with several features of the 2008 financial crisis.

Keywords: Heterogeneous beliefs; Disaster risk; Financial speculation; General equilibrium; Asset pricing; Real investment (search for similar items in EconPapers)
JEL-codes: E21 E22 G01 G11 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:119:y:2016:i:1:p:210-225

DOI: 10.1016/j.jfineco.2015.08.014

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