Non‐falsified Expectations and General Equilibrium Asset Pricing
The Power of the Peso
Bibliographic Data
| ID | 9707044 |
|---|---|
| Authors | Jean-Pierre Danthine (0000-0002-4410-0025, University of Lausanne), Jean‐Pierre Danthine (University of Lausanne and CEPR), John B Donaldson (Columbia University) |
| Year | 1999 |
| Volume | 109 |
| Issue | 458 |
| Pages | 607-635 |
| Publication date | 1999-10-01 |
| Peer Reviewed | Yes |
| Open Access | Yes |
| Type | ARTICLE |
| Venue | The Economic Journal (JOURNAL) |
| Journal identifiers | ISSN: 0013-0133 • E-ISSN: 1468-0297 |
| Publisher | Oxford University Press (OUP) (PUBLISHER) |
| DOI | 10.1111/1468-0297.00465 |
| OpenAlex | W1969499328 |
| Language | EN |
| References cited | 5 |
We discuss the extent to which the expectation of a rare event which happens not to materialise over the sample period, but which is not rationally excludable from the set of possibilities – the peso problem –, can affect the behaviour of rational agents and the characteristics of market equilibrium. To that end we describe quantitatively the macroeconomic and financial properties of a standard equilibrium business cycle model modified to allow for a very small probability of a depression state. We produce a model specification for which both business cycle characteristics and mean financial returns are in accord with United States observations.This paper examines the possibility that the large equity premium observed in the United States may result from the expectations of a disaster event, or set of events, which happen not to have materialised in the sample period of observations. Such a possibility, which falls under the rubric of a peso phenomenon, is supported by recent empirical work of Goetzman and Jorion (1997). Using return data for a wide range of countries, these authors conclude that the high historical premium in the United States is unique, and they conjecture that it may be attributable to the fact that disastrous events affecting other financial markets (e.g. WWII for Japan, Germany, and other European countries) have largely bypassed the American economy
Business cycle · Capital asset pricing model · Economics · Equity (law · Equity premium puzzle · Financial economics · Financial market · General equilibrium theory · Great Depression · Macroeconomics · Monetary economics · Rational expectations · Stock market · Economic theories and models · Finance · Financial Markets and Investment Strategies · Monetary Policy and Economic Impact
A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle
Asset Prices in an Exchange Economy
The equity premium
Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns
Solving the Stochastic Growth Model by Linear-Quadratic Approximation and by Value-Function Iteration
| Citation velocity | historical |
|---|---|
| Highly cited | No |