october, 2018

16oct12:00 pm1:15 pmSebastian MerkelStock Price Cycles and Business CyclesEvent:Student Research Workshop

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Event Details

(joint with Klaus Adam, University of Oxford}

Abstract:
We present a business cycle model in which Bayesian learning about stock price behavior gives rise to boom and bust cycles in stock prices. Stock price cycles transmit into the real economy by generating inefficient price signals for the desirability of new investment and act as a ‘financial accelerator’ that operates even in the absence of financial frictions. The model successfully replicates the quantitative behavior of U.S. stock prices and business cycles, despite assuming time-separable consumption preferences with low risk aversion, a perfectly flexible labor market, and featuring productivity shocks as the only exogenous driving force. Under rational stock price expectations, the model performs poorly: it generates only small amounts of stock price volatility and fails to match the volatility of investment and hours worked in the absence of investment-specific technology shocks.

Time

(Tuesday) 12:00 pm - 1:15 pm

Location

Bendheim Center for Finance Room 101

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