I am grateful to Sophie Bade, Theodoros Diasakos, James Dow, Paolo Ghirardato, Faruk Gul, David Kelsey, Marco Mariotti, Jean-Marc Tallon, Jan Werner, and an anonymous referee for helpful comments and suggestions.
Endogenous indeterminacy and volatility of asset prices under ambiguity
Article first published online: 18 SEP 2013
Copyright © 2013 Michael Mandler
Volume 8, Issue 3, pages 729–750, September 2013
How to Cite
Mandler, M. (2013), Endogenous indeterminacy and volatility of asset prices under ambiguity. Theoretical Economics, 8: 729–750. doi: 10.3982/TE1068
- Issue published online: 18 SEP 2013
- Article first published online: 18 SEP 2013
- Submitted 2011-9-8. Final version accepted 2012-9-5. Available online 2012-9-5.
- Ambiguity aversion;
- asset pricing;
- excess volatility;
- general equilibrium
If agents are ambiguity-averse and can invest in productive assets, asset prices can robustly exhibit indeterminacy in the markets that open after the productive investment has been launched. For indeterminacy to occur, the aggregate supply of goods must appear in precise configurations, but the investment levels that generate these supplies arise systematically. That indeterminacy arises only at a knife-edge set of aggregate supplies allows for a simple explanation of the volatility of asset prices: small changes in supplies necessarily lead to a large price response.