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Fundamental Volatility and Financial Stability

Author

Listed:
  • Gabriel Desgranges

    (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

  • Stéphane Gauthier

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Institute for Fiscal Studies - University of Manchester [Manchester])

Abstract

Financial investors choose the capital they invest into risky firms based on the return they expect. The actual return depends on fundamental shocks and the aggregate investment, which gives rise to beauty-contest issues. The paper characterizes how the ability of investors to solve these issues relates to the amount of fundamental volatility. It exploits this link to provide a quantitative assessment of the contribution of fundamentals to market volatility. Volatility would be driven by fundamentals in most markets. However out-ofequilibrium beliefs significantly contribute to observed volatility in markets of the financial sector.

Suggested Citation

  • Gabriel Desgranges & Stéphane Gauthier, 2023. "Fundamental Volatility and Financial Stability," PSE Working Papers halshs-04210677, HAL.
    • Handle: RePEc:hal:psewpa:halshs-04210677
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-04210677v1
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Rational expectations; Market efficiency; Rationalizability; Beautycontest; Fundamental volatility; Behavioral finance; Excess volatility;
    All these keywords.

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