Speculative Growth, Overreaction, and the Welfare Cost of Technology-Driven Bubbles

Lansing, Kevin J.

doi:10.24148/wp2008-08

Cited by 7 publications

(5 citation statements)

References 11 publications

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“…As originally noted by Basu (1987), the functional form of the capital law of motion (4) implies a direct link between the market value of equity and firms' investment in physical capital. This feature of the model is consistent with the observed lowfrequency comovement between the real S&P 500 stock market index and real business investment in recent decades, as documented by Lansing (2012).…”

Section: Modelsupporting

confidence: 87%

“…The nonlinear formulation of equation (4) reflects the presence of capital adjustment costs. 3 Lansing (2012) shows that the Cobb-Douglas form of Equation (4) can be viewed as a log-linearized version of the nonlinear law of motion for capital employed by Jermann (1998). 4 Following Cassou and Lansing (1997) and Lansing and Markiewicz (2018), I allow for a "capital law multiplier shock" v t that evolves as a stationary AR(1) process with persistence parameter ρ v and innovation variance σ 2 ε,v .…”

Section: Modelmentioning

confidence: 99%

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Real business cycles, animal spirits, and stock market valuation

Lansing

2018

Int J of Economic Theory

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This paper develops a real business cycle model with five types of fundamental shocks and one “equity sentiment shock” that captures fluctuations driven by animal spirits. The representative agent's perception that movements in equity value are partly driven by sentiment turns out to be close to self‐fulfilling. I solve for the sequences of shock realizations that allow the model to exactly replicate the observed time paths of US consumption, investment, hours worked, the stock of physical capital, capital's share of income, and the S&P 500 market value from 1960.Q1 onwards. The model‐identified sentiment shock is strongly correlated with survey‐based measures of US consumer sentiment. Counterfactual scenarios with the model suggest that the equity sentiment shock has an important influence on the paths of most US macroeconomic variables.

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Section: Modelsupporting

confidence: 87%

Section: Modelmentioning

confidence: 99%

Real business cycles, animal spirits, and stock market valuation

Lansing

2018

Int J of Economic Theory

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“…Sampling Variation in cov[Dlog(z t ), x t ] Affects the Real-time Learning Paths 15Lansing (2009) considers the welfare cost of speculative overreaction in a production economy with endogenous long-run consumption growth.…”

mentioning

confidence: 99%

Rational and Near‐Rational Bubbles Without Drift

Lansing

2010

The Economic Journal

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This paper derives a general class of intrinsic rational bubble solutions in a standard Lucas-type asset pricing model. I show that the rational bubble component of the pricedividend ratio can evolve as a geometric random walk without drift. The volatility of bubble innovations depends exclusively on fundamentals. Starting from an arbitrarily small positive value, the rational bubble expands and contracts over time in an irregular, wholly endogenous fashion, always returning to the vicinity of the fundamental solution. I also examine a near-rational solution in which the representative agent does not construct separate forecasts for the fundamental and bubble components of the asset price. Rather, the agent constructs only a single forecast for the total asset price that is based on a geometric random walk without drift. The agent's forecast rule is parameterized to match the moments of observable data. In equilibrium, the actual law of motion for the price-dividend ratio is stationary, highly persistent, and nonlinear. The agent's forecast errors exhibit near-zero autocorrelation at all lags, making it di¢ cult for the agent to detect a misspeci…cation of the forecast rule. Unlike a rational bubble, the near-rational solution allows the asset price to occasionally dip below its fundamental value. Under mild risk aversion, the near-rational solution generates pronounced low-frequency swings in the price-dividend ratio, positive skewness, excess kurtosis, and time-varying volatility-all of which are present in long-run U.S. stock market data. An independent contribution of the paper is to demonstrate an approximate analytical solution for the fundamental asset price that employs a nonlinear change of variables.

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“…Other examples along these lines includeAmbler and Paquet (1994), Justiniano, Primiceri, and Tambalotti (2010), Waggoner and Zha (2011), and Furlanetto and Seneca (2014.9Lansing (2012) shows that equation (11) with h2;t = 0 maps directly to a log-linear approximate version of the law of motion for capital employed byJermann (1998).…”

mentioning

confidence: 99%

Replicating Business Cycles and Asset Returns with Sentiment and Low Risk Aversion

Lansing¹

2021

ERWP

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This paper develops a real business cycle model with eight fundamental shocks and one "equity sentiment shock" that captures belief-driven ‡uctuations. I solve for the time series of shock realizations that allow the model to exactly replicate the observed time paths of U.S. macroeconomic variables and asset returns over the past six decades. The representative agent's perception that movements in equity value are partly driven by sentiment is close to self-ful…lling. The model-identi…ed sentiment shock is strongly correlated with other fundamental shocks and implies "pessimism"relative to fundamental equity value in steady state. Counterfactual scenarios show that the sentiment shock and shocks that appear in the law of motion for capital (representing …nancial frictions) have large impacts on the levels of macroeconomic variables and the size of the equity risk premium. Other shocks have large impacts on the growth rates of macroeconomic variables. Four of the model-identi…ed shocks help to predict the equity risk premium or the bond term premium in the next quarter. Overall, the results support a narrative in which a large number of correlated shocks have combined to deliver the historical outcomes observed in U.S. data.

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Speculative Growth, Overreaction, and the Welfare Cost of Technology-Driven Bubbles

Cited by 7 publications

References 11 publications

Real business cycles, animal spirits, and stock market valuation

Real business cycles, animal spirits, and stock market valuation

Rational and Near‐Rational Bubbles Without Drift

Replicating Business Cycles and Asset Returns with Sentiment and Low Risk Aversion

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