Endogenous uncertainty and market volatility (Q5940605)

This model is based on the theory of rational beliefs and rational belief equilibrium developed in 1994, 1997 by M. Kurz. Those theories were developed with the view of studying the effects of the beliefs of economic agents on the volatility of economic variables and on social risk. We also examine that the idea of the `equity premium puzzle' can be resolved using the rational beliefs theory. This paper presents a verified framework for the study of market volatility. It argues that the distribution of beliefs is the central volatility propagation mechanism in the market. This paper also studies the effect of the correlation of beliefs among investors. It show that the main effect of such correlation is the dynamic patter as of asset prices and returns and is hence important for studying such phenomena as stochastic volatility.