Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/223380 
Year of Publication: 
2019
Series/Report no.: 
Texto para discussão No. 669
Publisher: 
Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia, Rio de Janeiro
Abstract: 
Speculation, in the spirit of Harrison and Kreps [1978], is introduced into a standard real business cycle model. Investors (speculators) hold heterogeneous beliefs about firm growth. Firm ownership, and thus, the firm's discount factor varies with waves of optimism and leverage. These waves ripple into firm investments in hours. The firm's discount discount factor links the equity premium and labor volatility puzzles. We obtain an upper bound to the amplification that can be generated by speculation for any model of beliefs - a factor of 1.5. A calibration based on diagnostic beliefs amplifies hours volatility by a factor of 1.15 and produces a bubble component of 20 percent.
Subjects: 
Heterogeneous Beliefs
Business Cycles
Asset Prices
Speculation
Bubbles
JEL: 
D84
E32
E44
E71
G41
Document Type: 
Working Paper

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