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

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