Macro-financial volatility under dispersed information

Jianjun Miao, Jieran Wu () and Eric Young
Additional contact information
Jieran Wu: School of Economics, Zhejiang University

Theoretical Economics, 2021, vol. 16, issue 1

Abstract: We provide a production-based asset pricing model with dispersed information and small deviations from full rational expectations. In the model, aggregate output and equity prices depend on the higher-order beliefs about aggregate demand and individual stochastic discount factors. We prove that equity price volatility becomes arbitrarily large as the volatility of idiosyncratic shocks diverges to infinity due to the interaction of signal-extraction with idiosyncratic trading decisions, while aggregate output volatility falls. We propose a two-step spectral factorization method that permits closed-form solutions in the frequency domain applicable to a wide range of models with more hidden states than signals. Our model can quantitatively match output and equity volatilities observed in US data.

Keywords: Dispersed information; frequency domain analysis; higher-order beliefs; asset pricing; business cycles; incomplete markets (search for similar items in EconPapers)
JEL-codes: E32 E44 G12 G14 (search for similar items in EconPapers)
Date: 2021-01-15
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://econtheory.org/ojs/index.php/te/article/viewFile/20210275/29626/856 (application/pdf)

Related works:
Working Paper: Macro-Financial Volatility under Dispersed Information (2019)
Working Paper: Macro-Financial Volatility under Dispersed Information (2019)
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:the:publsh:3872

Access Statistics for this article

Theoretical Economics is currently edited by Simon Board, Todd D. Sarver, Juuso Toikka, Rakesh Vohra, Pierre-Olivier Weill

More articles in Theoretical Economics from Econometric Society
Bibliographic data for series maintained by Martin J. Osborne ().