‘‘Overreaction’’ of Asset Prices in General Equilibrium

  title={‘‘Overreaction’’ of Asset Prices in General Equilibrium},
  author={S. Rao Aiyagari and Mark Gertler},
We attempt to explain the overreaction of asset prices to movements in shortterm interest rates, dividends, and asset supplies. The key element of our explanation is a margin constraint that traders face which limits their leverage to a fraction of the value of their assets. Traders may lever themselves, furthermore, either directly by borrowing short term or indirectly by engaging in futures and options trading, so that the scenario is relevant to contemporary financial markets. When some… CONTINUE READING
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