Title: Waves of Optimism and Pessimism
Publisher: Publications Office of the European Union
Publication Year: 2013
JRC N°: JRC81165
ISBN: 978-92-79-29720-5
ISSN: 1831-9424
Other Identifiers: EUR 25954
URI: http://publications.jrc.ec.europa.eu/repository/handle/JRC81165
DOI: 10.2788/89298
Type: EUR - Scientific and Technical Research Reports
Abstract: We consider a simple consumption-based asset pricing model with two types of investors who have access to the same observations but who use different updating rules to infer information about the growth state of the economy. In particular, we consider an optimistic and pessimistic group of agents who use distorted Bayesian updating rules. The aim of the work is to understand to what extent the interaction of such distorted Bayesian rules can explain low and medium frequency characterization of dynamics movements observed in the price dividend ratios and can give rise endogenously to waves of pessimism and optimism which are associated with sustained asset price booms and busts. The analysis shows that heterogeneity in ambiguity loving/aversion preferences appears to be an important factor to capture medium-frequency waves observed on asset prices.
JRC Directorate:Space, Security and Migration

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