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Title: Global Sunspots and Asset Prices in a Monetary Economy

Author(s): Roger E A Farmer

Publication Date: February 2015

Keyword(s): asset prices and sunspots

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: This paper constructs a simple model in which asset price fluctuations are caused by sunspots. Most existing sunspot models use local linear approximations: instead, I construct global sunspot equilibria. My agents are expected utility maximizers with logarithmic utility functions, there are no fundamental shocks and markets are sequentially complete. Despite the simplicity of these assumptions, I am able to go a considerable way towards explaining features of asset pricing data that have presented an obstacle to previous models that adopted similar assumptions. My model generates volatile persistent swings in asset prices, a substantial term premium for long bonds and bursts of conditional volatility in rates of return.

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Bibliographic Reference

Farmer, R. 2015. 'Global Sunspots and Asset Prices in a Monetary Economy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10402