TY  - JOUR
AU  - Aiyagari,S. Rao
AU  - Gertler,Mark
TI  - "Overreaction" of Asset Prices in General Equilibrium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6747
PY  - 1998
Y2  - October 1998
UR  - http://www.nber.org/papers/w6747
L1  - http://www.nber.org/papers/w6747.pdf
N1  - Author contact info:
Mark Gertler
Department of Economics
New York University
269 Mercer Street, 7th Floor
New York, NY 10003
Tel: 212/998-8931
Fax: 212/995-4186
E-Mail: mark.gertler@nyu.edu
AB  - We attempt to explain the overreaction of asset prices to movements in short-term interest rates, dividends, and asset supplies.  The key element of our explanation is a margin constraint that traders face which limits their leverage to a fraction of the value of their assets.  Traders may lever themselves further, either directly by borrowing short term or indirectly by engaging in futures and options trading, so that the scenario is relevant to contemporary financial markets.  When some shock pushes asset prices to a low enough level at which the margin constraint binds, traders are forced to liquidate assets. This drives asset prices below what they would be with frictionless markets.  Also, a shock which simply increases the likelihood that the margin constraint will bind can have a very similar effect on asset prices.  We construct a general equilibrium model with margin constrained traders and derive some qualitative properties of asset prices.  We present an analytical solution for a deterministic version of the model and a simple numerical computation of the stochastic version.
ER  -