Must-read: Roger Farmer: “Global Sunspots and Asset Prices in a Monetary Economy”
Must-Read: : Global Sunspots and Asset Prices in a Monetary Economy: “A simple model in which asset price fluctuations are caused by sunspots…
…I construct global sunspot equilibria. My agents are expected utility maximizers with logarithmic utility functions, there are no fundamental shocks and markets are sequentially complete. Despite the simplicity of these assumptions, I am able to go a considerable way towards explaining features of asset pricing data that have presented an obstacle to previous models that adopted similar assumptions. My model generates volatile persistent swings in asset prices, a substantial term premium for long bonds and bursts of conditional volatility in rates of return.