Indeterminacy and Asset Price Volatility in Stochastic Overlapping Generations Models∗

This paper addresses the e ects of indeterminacy on the volatility of asset prices in a stochastic overlapping generations model with 3-period lived agents. With complete markets, indeterminacy is characterized by the initial conditions and all equilibria converge to one of the deterministic steady states in the long run. With incomplete markets, the degree of indeterminacy is countably innite. Importantly, equilibria in the long run do not converge, meaning that equilibrium properties are determined by both the economic primitives and the endogenous price expectations of agents. Using an innovative computational methodology, we characterize the entire equilibrium set using recursive techniques. Our numerical simulations suggest that asset price volatility has substantial welfare e ects, persists in the long run, and is primarily driven by the endogenous price expectations of agents.