Learning, Rare Events, and Recurrent Market Crashes in Frictionless Economies without Intrinsic Uncertainty

Alvaro Sandroni

doi:10.1006/jeth.1998.2436

Learning, Rare Events, and Recurrent Market Crashes in Frictionless Economies without Intrinsic Uncertainty

Alvaro Sandroni^*

^*Corresponding author for this work

Managerial Economics, Decision Sciences and Operations

Research output: Contribution to journal › Article › peer-review

7 Scopus citations

Abstract

In this paper I consider a dynamically complete market model without intrinsic uncertainty. The only uncertainty is modelled by sunspots. Agents' beliefs are hetero- geneous, but eventually become homogeneous in the sense that agents' beliefs are identical in the limit. I show that if some states of nature occur rarely, then arbitrarily large market crashes may occur infinitely often. This result contrasts with Cass and Shell'sJ. Polit. Econ.91(1983), 193-227) results which show that when beliefs are homogeneous, in complete markets without intrinsic uncertainty, sunspots do not matter.Journal of Economic Literatureclassification number: D83

Original language	English (US)
Pages (from-to)	1-18
Number of pages	18
Journal	Journal of Economic Theory
Volume	82
Issue number	1
DOIs	https://doi.org/10.1006/jeth.1998.2436
State	Published - Sep 1998

Funding

I thank Stephen Morris and participants of the SITE Summer Workshop, Econometric Society Winter Meetings, University of Iowa Workshop, and NBER Macroeconomic Fluctuations Meetings for useful comments. Financial support from the National Science Foundation is gratefully acknowledged. All errors are mine.

ASJC Scopus subject areas

Economics and Econometrics

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Learning, Rare Events, and Recurrent Market Crashes in Frictionless Economies without Intrinsic Uncertainty

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