Speculation and Financial Wealth Distribution Under Belief Heterogeneity PDF Download

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Speculation and Financial Wealth Distribution Under Belief Heterogeneity

Speculation and Financial Wealth Distribution Under Belief Heterogeneity PDF Author: Dan Cao
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Languages : en
Pages : 64

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Book Description
Under limited commitment that prevents agents from pledging their future non-financial wealth, agents with incorrect beliefs always survive by holding on to their non-financial wealth. Friedman (1953)'s market selection hypothesis suggests that their financial wealth trends towards zero in the long run. However, in this paper, we present a dynamic general equilibrium model with incomplete markets due to collateral constraints and show that the hypothesis depends on the degree of market incompleteness. When markets are more incomplete, over-optimistic agents not only survive but also prosper by speculation. But they end up with low long run financial wealth when markets are more complete. In this model, stricter margin requirements protect the wealth of the optimists and thereby increase asset price volatility. The numerical method developed in this paper can be used for many other heterogeneous agent models with recursive utility functions, incomplete markets, portfolio constraints, and in the presence of non-tradable endowments.