In this paper, I first show that liquid assets make risk-averse agents better off by eliminating multiple equilibria and thus eliminating speculation based on nonfundamentals. I then show that illiquid assets make risk-averse agents worse off by enlarging the set of economies (or agent...

In this paper we estimate behavioural factors -- Keynes' 'animal spirits' -- in the property market. An enhanced Hidden Markov Model is used, for both the Shiller Home Price Index and a consumer confidence index. We conclude that both house prices and consumer confidence are driven by another...

Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known unique fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions...

We solve and test experimentally a global-games model of speculative attacks where agents can choose whether to read, at a cost, a payoff irrelevant (sunspot) announcement. Assuming that subjects exogenously believe some others to follow sunspots, we provide conditions for a unique equilibrium...

Recent crises have seen very large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics based on self-fulfilling shifts in risk made possible by a negative link between the current asset price and risk about the future asset price....

I exploit the leveraged exchange-traded funds' (ETFs) primary market to measure aggregate, uninformed, gambling-like demand, that is, speculation sentiment. The leveraged ETFs' primary market is a novel setting that provides observable arbitrage activity attributed to correcting mispricing...

The Great Recession seems to be creating a change in the trend of macroeconomic thinking. Prior to the financial crisis of 2008, dynamic stochastic general equilibrium (DSGE) models dominated the macroeconomics literature without any apparent challengers on the horizon. Since then, however, we...

The objective of this paper is to identify the determinants of office capitalization rates for a panel of 52countries (developed and emerging countries) between 2000 and 2006. Our assumption, based on a CapitalAsset Pricing Model, is that the capitalization rate should be at least proportional...

In this paper we examine the problem of partially hedging a given credit risk exposure. We derive hedges which satisfy certain optimality criteria: For a given investment into the hedge they minimize the remaining risk, or vice versa. This is motivated by the fact that it is a core business of...

In this paper we have developed a financial model of the non-life insurer to provide assistance for the management of the insurance company in making decisions on product, investment and reinsurance mix. The model is based on portfolio theory and recognizes the stochastic nature of and the...