Endogenous indeterminacy and volatility of asset prices under ambiguity

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,: Department of Economics, Royal Holloway College, University of London
Authors registered in the RePEc Author Service: Michael Mandler

Theoretical Economics, 2013, vol. 8, issue 3

Abstract: If agents are ambiguity-averse and can invest in productive assets, asset prices can robustly exhibit indeterminacy in the markets that open after the productive investment has been launched. For indeterminacy to occur, the aggregate supply of goods must appear in precise configurations but the investment levels that generate these supplies arise systematically. That indeterminacy arises only at a knife-edge set of aggregate supplies allows for a simple explanation of the volatility of asset prices: small changes in supplies necessarily lead to a big price response.

Keywords: Ambiguity aversion; asset pricing; indeterminacy; excess volatility; general equilibrium (search for similar items in EconPapers)
JEL-codes: D51 D53 D81 G12 (search for similar items in EconPapers)
Date: 2013-09-18
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Citations: View citations in EconPapers (17)

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