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Learning Rare Events

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  • Alvaro Sandroni

Abstract

In this paper I consider a dynamically complete market model without intrinsic uncertainty. The only uncertainty is modelled by sunspots. Agents' beliefs are heterogeneous, but eventually become homogeneous in the sense that agents' beliefs are identical in the limit. I show that if some states of nature occur rarely then arbitrarily large market crashes may occur infinitely often. This result contrasts with Cass and Shell's (83) results which show that when beliefs are homogeneous, in complete markets without intrinsic uncertainty, sunspots do not matter.

Suggested Citation

  • Alvaro Sandroni, 1997. "Learning Rare Events," Discussion Papers 1199, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1199
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    References listed on IDEAS

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    More about this item

    Keywords

    Convergence to Rational Expectations; Learning; Rate Events; Market Crashes.;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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