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Thesis

English

ID: <

10670/1.irju4l

>

Where these data come from
Three Essays on the Role of Expectations During the Recent Economic Turmoil

Abstract

In view of the disconnect between the pricing of three types of assets (two types of financial assets and real-estate assets) and economic fundamentals in the recent period ofsevere economic and financial crises, this thesis aims at highlighting the role of economicagents’ expectations.First, this thesis emphasizes that the role of expectations in the recent Eurozonesovereign debt crisis relates to strategic complementarities in agents’ decisions. In thisrespect, this thesis focuses on one major but mostly unnoticed fact: the share of governmentdebt held by the resident sector increased beginning at the end of 2008 in the mostfragile economies of the zone. We show that – whereas public debt shocks positively affectthe home bias in sovereign debt – pessimistic expectation shocks can also significantlyexplain variations in home bias.Second, this thesis shows that excess volatility in stock and in house prices relativeto fundamentals can be accounted for by standard models when the rational expectationshypothesis is relaxed and when agents are assumed to estimate the parameters of the lawsof motion driving the dynamics of economic fundamentals – that is, as econometricians.Under this assumption, a standard asset pricing model can explain the persistently highvaluation in US stock prices in the early 2000s followed by their dramatic bust by 2009.Finally, we show that modelling Bayesian learning regarding house prices in the contextof a DSGE model with credit frictions allows us to simultaneously replicate the dramaticvolatility in house prices - which played a crucial role in the subprime crisis - and in businesscycle variables over the 1985-2015 period.

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