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Endogenous Participation Rick in Speculative Markets

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  • Edouard Challe

    (University of Cambridge)

Abstract

This paper analyses the dynamic implications of an asset-pricing model with incomplete participation due to entry costs. It is shown that heterogeneity in entry costs can lead to the existence of multiple stochastic sunspot equilibria, whereby the number of agents in the market and asset prices fluctuate endogeneously over time in the absence of fundamental uncertainty. Such asset-price fluctuations occur despite the uniqueness of the deterministic equilibrium, and thus bear no link to the usual notion of steady-state indeterminacy. In addition to excess volatility, the equilibria exhibit predictable and conditionally heteroskedastic returns.
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Suggested Citation

  • Edouard Challe, 2005. "Endogenous Participation Rick in Speculative Markets," Money Macro and Finance (MMF) Research Group Conference 2005 90, Money Macro and Finance Research Group.
    • Handle: RePEc:mmf:mmfc05:90
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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