Can Small Fluctuations in Investors' Subjective Preferences Induce Large Volatility in Equity Prices?
Rajnish Mehra () and
Raaj Sah ()
No 9917, Working Papers from Harris School of Public Policy Studies, University of Chicago
This paper focuses on the potential effects of small fluctuations in investors' subjective preferences (specifically, their discount factors and attitudes towards risk) on the volatility of equity prices. We briefly summarize some of the arguments and evidence regarding the fluctuations in subjective preferences. Our analysis indicates that such fluctuations may have significant implications for understanding the volatility of the prices of financial assets. We derive a closed-form expression for equilibrium equity prices, and use this expression to map the fluctuations in investors' subjective preferences to the fluctuations in equity prices. Our analysis suggests that small fluctuations in the discount factor have potentially large effects on the latter. For example, if the standard deviation of the fluctuations in the discount factor is of the order of 1/10th of one percent, then this by itself can induce a 3 to 4% standard deviation in the fluctuations in equity prices. The fluctuations in the attitude towards risk have a smaller, but nevertheless non-negligible effect. We present the intuition underlying our conclusions.
Keywords: equity prices; volatility; discount factor; risk (search for similar items in EconPapers)
References: Add references at CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
http://harrisschool.uchicago.edu/about/publication ... ers/pdf/wp_99_17.pdf (application/pdf)
Journal Article: Mood fluctuations, projection bias, and volatility of equity prices (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:har:wpaper:9917
Access Statistics for this paper
More papers in Working Papers from Harris School of Public Policy Studies, University of Chicago Contact information at EDIRC.
Bibliographic data for series maintained by Eleanor Cartelli ( this e-mail address is bad, please contact ).