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Title:Return predictability and stock market crashes in a simple rational expectations model PDF Logo
Authors:Lüders, Erik
Franke, Günter
Issue Date:2005
Series/Report no.:Discussion paper series // Zentrum für Finanzen und Ökonometrie, Universität Konstanz 2005,05
Abstract:This paper presents a simple rational expectations model of intertemporal asset pricing. It shows that 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-17807
Document Type:Working Paper
Appears in Collections:CoFE-Diskussionspapiere, Universität Konstanz

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