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.