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Complex Stock Price Dynamics and Recurrent Bubbles under the Spirit of Capitalism

Marco Airaudo ()

DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade

Abstract: We embed Max Weber (1958)'s spirit of capitalism (SOC) into an otherwise standard Lucas' tree asset pricing model, by assuming that economic agents care about their social status and that the latter is related to financial wealth. We show that, absent uncertainty, for a wide range of values for the coefficient of relative risk aversion, the SOC combined with a sufficient growth rate of dividends can induce both cyclical and chaotic fluctuations in the price-dividend ratio. Once fundamental uncertainty is introduced - in the form of a stationary shock to dividends growth - the model is capable of generating recurrent boom-bust cycles which are completely endogenous and resemble the stock price bubble episodes observed in the real world. Interestingly, these volatile dynamics are obtained without necessarily assuming the existence of sizable (sunspot-driven) expectational errors. We show that, for both the deterministic and the stochastic case, endogeneous fluctuations can be effectively smoothed by a small tax on capital gains, while taxing dividends seems to be a rather bad idea.

Keywords: Asset Pricing; Bubbles; Endogenous Cycles; Chaotic Dynamics; Status; Wealth Preferences; Spirit of Capitalism; Dividends Taxation; Capital Gains Taxation (search for similar items in EconPapers)
JEL-codes: C61 C62 E21 E32 E62 G12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2012-09
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