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Self-Fulfilling Risk Panics: An Expected Utility Framework

Jess Benhabib (), Xuewen Liu and Pengfei Wang ()

No 28284, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions within an OLG structure. Our paper further shows that the existence of sentiment-driven equilibria is robust in a standard infinite-period model as long as the pricing kernel is affected by the asset price.

JEL-codes: E44 G01 G11 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-mac, nep-ore and nep-upt
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