IDEAS home Printed from https://ideas.repec.org/a/eee/jetheo/v223y2025ics0022053124001601.html
   My bibliography  Save this article

Segmentation and beliefs: A theory of self-fulfilling idiosyncratic risk

Author

Listed:
  • Khorrami, Paymon
  • Zentefis, Alexander K.

Abstract

We study a multi-location general equilibrium model with financial market segmentation that permits self-fulfilling fluctuations. In a precise sense, such fluctuations are most often redistributive, but their volatility varies systematically with an aggregate latent factor. We thus provide a coordination-based microfoundation for time-varying idiosyncratic risk. A key assumption of our analysis is that cash flow growth rates (e.g., firm profit growth, asset dividend growth, or country output growth) rise with valuations. We consider two applications: (i) firm dynamics and their risk factor structure; and (ii) exchange rate disconnect in international macroeconomics.

Suggested Citation

  • Khorrami, Paymon & Zentefis, Alexander K., 2025. "Segmentation and beliefs: A theory of self-fulfilling idiosyncratic risk," Journal of Economic Theory, Elsevier, vol. 223(C).
    • Handle: RePEc:eee:jetheo:v:223:y:2025:i:c:s0022053124001601
    DOI: 10.1016/j.jet.2024.105954
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022053124001601
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jet.2024.105954?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Idiosyncratic risk; Segmented markets; Volatility; Asset pricing; Multiple equilibria;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:223:y:2025:i:c:s0022053124001601. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622869 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.