EconPapers    
Economics at your fingertips  
 

Return predictability and stock market crashes in a simple rational expectations model

Erik Lüders and Günter Franke

No 05/05, CoFE Discussion Papers from University of Konstanz, Center of Finance and Econometrics (CoFE)

Abstract: This paper presents a simple rational expectations model of intertemporal asset pricing. It shows that heterogeneous risk aversion of investors is likely to generate declining aggregate relative risk aversion. This leads to predictability of asset returns and high and persistent volatility. Stock market crashes may be observed if relative risk aversion differs strongly across investors. Then aggregate relative risk aversion may sharply increase given a small impairment in fundamentals so that asset prices may strongly decline. Changes in aggregate relative risk aversion may also lead to resistance and support levels as used in technical analysis. For numerical illustration we propose an analytical asset price formula.

Keywords: Aggregate relative risk aversion; Equilibrium asset price processes; Excess Volatility; Return predictability; Stock market crashes (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2005
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/32183/1/485079348.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cofedp:0505

Access Statistics for this paper

More papers in CoFE Discussion Papers from University of Konstanz, Center of Finance and Econometrics (CoFE) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().

 
Page updated 2019-10-02
Handle: RePEc:zbw:cofedp:0505