What to expect when everyone is expecting: Self-fulfilling expectations and asset-pricing puzzles

Nicolae Gârleanu and Stavros Panageas

Journal of Financial Economics, 2021, vol. 140, issue 1, 54-73

Abstract: We study an economy without bubbles in which expectations about future discount rates can become self-fulfilling because asset valuations redistribute wealth across different investor cohorts. For such redistribution to take place, the wealth of arriving and existing cohorts must react differently to discount rates, and in addition only the existing agents are marginal in financial markets. The self-fulfilling nature of discount rate expectations means that the economy can address several well-documented empirical asset-pricing facts (excessive volatility, return predictability, low interest rate level and volatility), while all real quantities (aggregate consumption and dividend growth) are smooth.

Keywords: Asset pricing; Self-fulfilling expectations; Sunspot equilibria; Equity premium puzzle; Excess volatility puzzle; Inequality (search for similar items in EconPapers)
JEL-codes: G01 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X20302828
Full text for ScienceDirect subscribers only

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:eee:jfinec:v:140:y:2021:i:1:p:54-73

DOI: 10.1016/j.jfineco.2020.10.007

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().