Fundamental Volatility and Financial Stability
Gabriel Desgranges () and
Stephane Gauthier
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Gabriel Desgranges: THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université
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Abstract:
Financial investors choose the capital they invest into risky firms based on the return they expect. The actual return depends on fundamental shocks and the aggregate investment, which gives rise to beauty-contest issues. The paper characterizes how the ability of investors to solve these issues relates to the amount of fundamental volatility. It exploits this link to provide a quantitative assessment of the contribution of fundamentals to market volatility. Volatility would be driven by fundamentals in most markets. However out-ofequilibrium beliefs significantly contribute to observed volatility in markets of the financial sector.
Keywords: Rational expectations; Market efficiency; Rationalizability; Beautycontest; Fundamental volatility; Behavioral finance; Excess volatility (search for similar items in EconPapers)
Date: 2023-09-19
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Working Paper: Fundamental Volatility and Financial Stability (2023) 
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