Macro-Financial Volatility under Dispersed Information
Jianjun Miao (),
Jieran Wu () and
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Jieran Wu: Zhejiang University
No WP2019-12, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics
We provide a production-based asset pricing model with dispersed information and small deviations from full rational expectations. In the log-linearized equilibrium system, aggregate output and equity prices depend on the higherorder beliefs about average forecasts of aggregate demand and individual stochastic discount factors, respectively. We prove that the presence of dispersed information reduces aggregate output volatility under very general information structures with strategic complementarity in production decisions. In contrast, equity price volatility becomes arbitrarily large as the volatility of the idiosyncratic shock approaches infinity due to the interaction of signal-extraction with idiosyncratic trading decisions. We show our analytical results using the frequencydomain techniques. Our model matches output and equity volatilities observed in the data.
Keywords: Dispersed Information; Frequency Domain Analysis; Higherorder Beliefs; Asset Pricing; Business Cycle; Incomplete Markets (search for similar items in EconPapers)
JEL-codes: E32 E44 G12 G14 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2016-09, Revised 2019-05
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Journal Article: Macro-financial volatility under dispersed information (2021)
Working Paper: Macro-Financial Volatility under Dispersed Information (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2019-012
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