Animal Spirits and Risk in Financial Markets

• Authors: Ilomäki Jukka
• Languages of publication: EN

Abstracts

EN

Keynes argues that a beauty contest in financial markets is a combination of rational higher-order beliefs and market psychology or animal spirits. We find that a stable equilibrium, where also market psychology is included, can be possible if uninformed investors agree to reduce their required rate of return indicating that they enlarge the risk of their investment with the animal spirits component.

Keywords

EN

Risk; Portfolio Choice; Asset Pricing

• Publisher: Uniwersytet Warszawski. Wydawnictwo Naukowe Wydziału Zarządzania
• Journal: Journal of Banking and Financial Economics
• Year: 2018
• Issue: 1(9)
• Pages: 52-59

Dates

online

2018-05-15

Contributors

author

Ilomäki Jukka

• University of Tampere

References

• Allen, F., Morris, S. and Shin, H. (2006) Beauty contests and iterated expectations in asset markets, Review of Financial Studies 19 ,719–752.
• Bacchetta, P. and Van Wincoop, E. (2008) Higher order expectations in asset pricing, Journal of Money, Credit and Banking 40, 837–866.
• Campbell, J. and Kyle, A. (1993) Smart money, noise trading and stock price behavior, Review of Economic Studies 60, 1–34.
• DeLong, B., Shleifer, A., Summers, L. and Waldmann, R. (1990) Positive feedback investment strategies and destabilizing rational speculation, Journal of Finance 45, 379–395.
• Engle, R. and Granger, C. (1987) Co-integration and error correction: Representation, estimation, and testing, Econometrica 55, 251–275.
• Froot, K., Scharfstein D., Stein, J. (1992) Herd on the street: Informational inefficiencies in a market with short-term speculation, Journal of Finance 47, 1461–1484.
• Ilomäki, J. (2016a) Animal spirits, beauty contests and expected returns, Journal of Economics and Finance, DOI: 10.1007/s12197-016-9364-8.
• Ilomäki, J. (2016b) Risk-free rates and animal spirits in financial markets, Annals of Financial Economics 11,No 3, 1–18.
• Ilomäki, J. (2017) Connecting theory and empirics for animal spirits, returns and interest rates: A clarification of “risk-free rates and animal spirits in financial markets”, Annals of Financial Economics 12, No 1, 1–2.
• Keynes, J. (1921) A Treatise of Probability, McMillan, London.
• Keynes, J. (1936) General Theory of Employment, Interest and Money, McMillan, London.
• Markowitz, H. (1952) Portfolio selection, Journal of Finance 7, 77–91.
• Samuelson, P. (1973) Proof that properly discounted present values of assets vibrate randomly, Bell Journal of Economics and Management 4, 369–374.
• Sharpe, W. (1964) Capital asset prices: A theory of market equilibrium under conditions of risk, Journal of Finance 19, 425–442.
• Shiller, R. (2014) Speculative asset prices, American Economic Review 104, 1486–1517.
• Shleifer, A. and Vishny, R. (1997) The limits of arbitrage, Journal of Finance 52, 35–55.

Identifiers

ISSN

2353-6845