Financial crises often originate in debt markets, where collateral constraints and opacity of asset values generate intrinsic instability. In such ambiguous contexts endogenous beliefs formation plays a crucial role in explaining asset price and leverage cycles. We introduce state-contingent ambiguity attitudes embedding ambiguity aversion and seeking, which endogenously induces pessimism (left-skewed beliefs) in recessions and optimism (rightskewed beliefs) in booms, in a model where borrowers face occasionally binding collateral constraints. We use GMM estimation with latent value functions to estimate the ambiguity attitudes process. By simulating a crisis scenario in our model we show that optimism in booms is responsible for higher asset price and leverage growth and pessimism in recessions is responsible for sharper de-leveraging and asset price bursts. Analytically and numerically (using global methods) we show that our state-contingent ambiguity attitudes coupled with the collateral constraints can explain relevant asset price and debt cycle facts around the unfolding of a financial crisis.
Ambiguity Attitudes, Leverage Cycle and Asset Prices / Patella, Valeria; Faia, Ester; Bassanin, Marzio. - In: CENTRE FOR ECONOMIC POLICY RESEARCH DISCUSSION PAPERS. - ISSN 1442-8636. - (2019).
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|Titolo:||Ambiguity Attitudes, Leverage Cycle and Asset Prices|
|Data di pubblicazione:||2019|
|Citazione:||Ambiguity Attitudes, Leverage Cycle and Asset Prices / Patella, Valeria; Faia, Ester; Bassanin, Marzio. - In: CENTRE FOR ECONOMIC POLICY RESEARCH DISCUSSION PAPERS. - ISSN 1442-8636. - (2019).|
|Appartiene alla tipologia:||13b Working paper|