ICEF/LFE Research Seminar

March 14 at 4.40 pm, room 3211 (Shabolovka st., 26) ICEF & LFE held the Research Seminar in Finance
Speaker: Matthew Hoelle (Purdue University)

March 14 at 4.40 pm, room 3211 (Shabolovka st., 26) International College of Economics and Finance and International Laboratore of Financial Economics held Research Seminar in Finance.
Speaker: Matthew Hoelle (Purdue University)
Theme: «Indeterminacy and Asset Price Volatility in Stochastic Overlapping Generations Models»
Venue:Shabolovka st. 26, building 3, room 3211

Abstract:This paper addresses the effects of indeterminacy on the volatility of asset prices in a stochastic overlapping generations model with 3-period lived agents. With complete markets, the only indeterminacy is due to the selection of initial conditions for the economy. As with deterministic economies, the equilibrium set converges to the steady state in the long run. With incomplete markets, not only do the initial conditions introduce indeterminacy, but additionally each period a continuum of state price vectors can be selected as equilibrium continuation values. This additional indeterminacy in each period generates long-run price behavior that depends on both the fundamentals of the economy and the endogenous price expectations of agents. Using our innovative computational methodology, we characterize the entire set of sequential equilibria for an incomplete markets economy. Our numerical simulations suggest that asset price volatility has substantial welfare effects, persists in the long run, and is primarily driven by the endogenous price expectations of agents and not by endowment risk.

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