Speculation-driven business cycles

Arbeitspapier

Speculation, in the spirit of Harrison and Kreps [1978], is introduced into a standard real business cycle model. Investors (speculators) hold heterogeneous beliefs about firm growth. Firm ownership, and thus, the firm's discount factor varies with waves of optimism and leverage. These waves ripple into firm investments in hours. The firm's discount discount factor links the equity premium and labor volatility puzzles. We obtain an upper bound to the amplification that can be generated by speculation for any model of beliefs - a factor of 1.5. A calibration based on diagnostic beliefs amplifies hours volatility by a factor of 1.15 and produces a bubble component of 20 percent.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Texto para discussão ; No. 669

Classification and Topics

• Classification: Wirtschaft ; Expectations; Speculations ; Business Fluctuations; Cycles ; Financial Markets and the Macroeconomy ; Macro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy‡ ; Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets‡
• Subject: Heterogeneous Beliefs ; Business Cycles ; Asset Prices ; Speculation ; Bubbles

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bigio, Saki ; Zilberman, Eduardo
• Event: Veröffentlichung
• (who): Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia
• (where): Rio de Janeiro
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/223380
• Last update: 10.03.2025, 11:44 AM CET