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COMPLEX DYNAMICS IN LUCAS’ TREE ASSET PRICING MODEL WITH DYNAMIC SELF-CONTROL PREFERENCES

Published online by Cambridge University Press:  28 November 2019

Marco Airaudo
Marco Airaudo*
Affiliation:
Drexel University
*
Address correspondence to: Marco Airaudo, School of Economics, Drexel University, Gerri C. LeBow Hall, 3220 Market Street, Philadelphia, PA19104, USA. Phone: +1-215-898-6982. e-mail: [email protected].
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Abstract

This paper studies the global equilibrium dynamics implied by a Lucas’ tree asset pricing model where the representative agent is subject to temptation in consumption choices, and displays dynamic self-control preferences, as defined by Gul and Pesendorfer [(2004) Econometrica 72, 119–158.]. It shows that endogenous cycles of period 2 and higher, as well as chaotic dynamics exist provided temptation utility is sufficiently important (with respect to standard commitment utility) and sufficiently convex. For parameterizations leading to complex deterministic dynamics, a stochastic version of the model admits rational expectations equilibria displaying excess volatility with respect to the underlying fundamentals.

Keywords

Asset PricingTemptationSelf-ControlEndogenous CyclesChaotic DynamicsSunspot Equilibrium
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 7 , October 2021 , pp. 1755 - 1778
Copyright
© Cambridge University Press 2019

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Footnotes

I am grateful to the Associate Editor and an anonymous referee for their helpful feedbacks. I would also like to thank seminar participants at Collegio Carlo Alberto (Italy), the 2014 Symposium of the Society for Nonlinear Dynamics and Econometrics (Baruch College, New York), the 2015 Workshop of the Central European Program in Economic Theory (University of Udine, Italy), and the Fall 2015 Midwest Theory Meeting (Penn State University, State College, PA) for useful comments and suggestions. All errors remain mine.

References

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