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C02: Public interventions in asset markets

We develop quantitatively credible asset pricing models that shed light on the channels through which asset price volatility arises and on the channels that connect these price fluctuations with real economic allocations. The innovative aspect of the research approach consists in developing belief-driven approaches that emphasize lack of common knowledge and market incompleteness as the underlying fundamental frictions. We address whether and to what extent excess price volatility can justify public interventions in asset markets.


Project members (C02)


Policy outreach (C02)


Publications (C02)


Discussion papers (C02)



The financial crisis has renewed interest in understanding financial and macroeconomic outcomes jointly. Still unavailable to date are intellectually coherent and quantitatively credible economic models that allow us to understand volatility in asset markets and real economic outcomes (labor, investment, consumption). Recent work shows that subjective beliefs (investor optimism/pessimism) are a key driver explaining fluctuations in stock market valuation. We explore the consequences for real allocations and policy interventions. Monetary policy has been partly blamed for (housing market) booms. We ask how monetary policy choices affect market outcomes in stock, bond and housing markets.

Policy relevance

Macro policy increasingly focuses on financial “excesses"- e.g., leaning against housing prices, monitoring of credit booms (BIS), macroprudential policy. We evaluate the effectiveness of recently installed policy frameworks and proposals within quantitatively credible models. We study potential side effects and incentive problems associated with policy interventions. We disseminate our results to policy institutions such as ECB/Eurosystem, BIS, IMF, OECD.

Project plan

Work package 1 - Subjective expected returns and asset price fluctuations

  • Survey expectations pose a big challenge for standard asset pricing theories.
  • Cochrane (2011, 2016) suggests reinterpreting survey data. We evaluate the merits of this proposal.
  • The theory-based empirical tests evaluate whether or not survey returns can be interpreted as risk neutral return expectations.

Work package 2 - Subjective beliefs and the dynamics of bond yields

  • Construct yield curve models that can replicate yield curve dynamics and key properties of bond market investors' expectations.
  • Incorporate subjective beliefs and self-referential learning into a yield curve framework.

Work package 3 - Stock prices and real activity in the United States

  • Document key empirical facts linking stock price movements with labor market and investment outcomes.
  • Construct an integrated macro-finance model that replicates jointly observed stock price and macroeconomic dynamics.
  • The model allows us to quantify the welfare costs of asset price booms and the associated investment and labor market booms.

Work package 4 - Monetary policy and asset prices

  • Empirically study the effects of monetary policy shocks on housing, equity and bond prices.
  • In particular, we evaluate whether the effects of monetary policy depend on the state of investor optimism/pessimism as obtained from survey data.

Work package 5 - Stock price fluctuations and rational arbitrageurs

  • Evaluate the robustness of the pricing predictions of subjective belief models to the presence of arbitrageurs with rational price expectations.
  • Consider the role of an (infinitesimally) small arbitrageur, a positive mass of competitive arbitrageurs, and a large strategic arbitrageur.
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