EconStor >
Universität Konstanz >
Center of Finance and Econometrics (CoFE), Universität Konstanz >
CoFE-Diskussionspapiere, Universität Konstanz >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/32157
  
Title:Return predictability and stock market crashes in a simple rational expectation models PDF Logo
Authors:Franke, Günter
Lüders, Erik
Issue Date:2006
Series/Report no.:Discussion paper series // Zentrum für Finanzen und Ökonometrie, Universität Konstanz 2006,05
Abstract:This paper presents a simple rational expectations model of intertemporal asset pricing. It shows that state-independent heterogeneous risk aversion of investors is likely to generate declining aggregate relative risk aversion. This leads to predictability of asset returns and high and persistent volatility. Stock market crashes may be observed if relative risk aversion differs strongly across investors. Then aggregate relative risk aversion may sharply increase given a small impairment in fundamentals so that asset prices may strongly decline. Changes in aggregate relative risk aversion may also lead to resistance and support levels as used in technical analysis. For numerical illustration we propose an analytical asset price formula.
Subjects:Aggregate relative risk aversion
Equilibrium asset price processes
Excess Volatility
Return predictability
Stock market crashes
JEL:G12
Persistent Identifier of the first edition:urn:nbn:de:bsz:352-opus-24151
Document Type:Working Paper
Appears in Collections:CoFE-Diskussionspapiere, Universität Konstanz

Files in This Item:
File Description SizeFormat
527906301.pdf346.89 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/32157

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.