NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Global Sunspots and Asset Prices in a Monetary Economy

Roger E.A. Farmer

NBER Working Paper No. 20831
Issued in January 2015, Revised in February 2015
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth

This paper constructs a simple model in which asset price fluctuations are caused by sunspots. Most existing sunspot models use local linear approximations: instead, 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.

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Document Object Identifier (DOI): 10.3386/w20831

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