Self-Fulfilling Risk Panics: An Expected Utility Framework
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 fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions within an OLG structure. Our paper further shows that the existence of sentiment-driven equilibria is robust in a standard infinite-period model as long as the pricing kernel is affected by the asset price.
We are grateful to Alberto Bisin, Xiang Fang, and Zhongchao Yang for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.