Code for: Trading on Sunspots

Principal Investigator(s):  View help for Principal Investigator(s) Boyan Jovanovic, New York University; Viktor Tsyrennikov, Promontory

Version:  View help for Version V1

Name File Type Size Last Modified
trading_sunspots_plots.m text/x-matlab 8.9 KB 10/16/2022 08:23:PM
trading_sunspots_readme.txt text/plain 2.9 KB 10/16/2022 08:22:PM

Project Citation: 

Jovanovic, Boyan, and Tsyrennikov, Viktor. Code for: Trading on Sunspots. Nashville, TN: American Economic Association [publisher], 2022. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2022-11-21. https://doi.org/10.3886/E171821V1

Project Description

Summary:  View help for Summary
In a model with multiple Pareto-ranked equilibria, we show that the set of equilibria shrinks if we allow trade in assets that pay based on the realization of a sunspot acting as an equilibrium-selection device. When the probability of a low-output outcome is high, the desire to insure against it leads the poor to promise large transfers to the rich in the high-output state. The rich then lose the incentive to exert the effort needed to sustain the high output. Thus the opening of financial markets may destroy the high equilibrium.

Scope of Project

Subject Terms:  View help for Subject Terms sunspots; financial markets
JEL Classification:  View help for JEL Classification
      E32 Business Fluctuations; Cycles
Geographic Coverage:  View help for Geographic Coverage none


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Published Versions

V1 [2022-11-21]

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