Discussion paper

DP10402 Global Sunspots and Asset Prices in a Monetary Economy

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.


Farmer, R (2015), ‘DP10402 Global Sunspots and Asset Prices in a Monetary Economy‘, CEPR Discussion Paper No. 10402. CEPR Press, Paris & London. https://cepr.org/publications/dp10402