Slides from 2016 PK Conference

1. ASSET PRICING UNDER UNCERTAINTY:
A KEYNESIAN MACROECONOMIC
MODEL
DR. GUILHERME R. S. SOUZA E SILVA (UFPR – BRAZIL)
DR. MARCELO LUIZ CURADO (UFPR – BRAZIL)
13TH INTERNATIONAL POST KEYNESIAN CONFERENCE

2. ASSET PRICING
CONVENTIONAL THEORY
1) FUNDAMENTAL VALUE
2) RISK ANALYSIS
3) RATIONAL EXPECTATIONS
4) EFFICIENT MARKETS
5) PORTFOLIO THEORY
KEYNESIAN THEORY
1) SPECULATION, MKT. PSYCHOLOGY
2) UNCERTAINTY
3) HERD BEHAVIOR
4) LIQUIDITY X EFFICIENCY
5) MACROECONOMIC RELATIONS

3. 1) FUNDAMENTAL VALUE / SPECULATION, MARKET PSYCHOLOGY
• FUNDAMENTAL VALUE: Intrinsic value is defined to be the “present value” of all expected
future net cash flows to the company; it is calculated via discounted cash flow valuation.
• KEYNES (1936): “The outstanding fact is the extreme precariousness of the basis of
knowledge on which our estimates of prospective yield have to be made”.
• KEYNES (1936): “Thus the professional investor is forced to concern himself with the
anticipation of impending changes, in the news or in the atmosphere, of the kind by which
experience shows that the mass psychology of the market is most influenced”.

4. 2) RISK ANALYSIS / UNCERTAINTY
• KNIGHT (1921): “It will appear that a measurable uncertainty, or "risk" proper, as we
shall use the term, is so far different from an unmeasurable one that it is not in effect an
uncertainty at all. We shall accordingly restrict the term "uncertainty" to cases of the non-
quantitive type”.
3) RATIONAL EXPECTATIONS / HERD BEHAVIOR
• KEYNES (1936): “We are merely reminding ourselves that human decisions affecting the
future, whether personal or political or economic, cannot depend on strict mathematical
expectation, since the basis for making such calculations does not exist; [...]”

5. 4) EFFICIENT MARKETS / LIQUIDITY X EFFICIENCY
• FAMA (1970): “In general terms, the theory of efficient markets is concerned with whether
prices at any point in time ‘fully reflect’ available information.[…]
In short, the evidence in support of efficient markets model is extensive, and (somewhat
uniquely in economics) contradictory evidence is sparse”.
• DAVIDSON (2002): “In the real world, efficient markets are not liquid and liquid markets
are not efficient”.
5) PORTFOLIO THEORY / MACROECONOMIC RELATIONS

6. HARVEY (2010)
ሻ𝑉 = 𝑉(𝑌, 𝑟
𝜕𝑉
𝜕𝑌
> 0 ;
𝜕𝑉
𝜕𝑌
= 𝑓 𝜑 ;
𝜕2 𝑉
𝜕𝑌𝜕𝜑
> 0
𝑃𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 = 𝑉
Depends on
𝜑
Optimism
State of Confidence

7. THE MACROECONOMIC MODEL
IS: 𝒀 = 𝑪 + 𝑰 + 𝑮 (1)
LM: 𝒎 𝒓, 𝒀, 𝝋 𝑾 =
𝑴
𝒑
(2)
𝒃 𝒓, 𝒀, 𝝋 𝑾 =
𝑩
𝒑
(3)
𝒗 𝒓, 𝒀, 𝝋 𝑾 =
𝑽
𝒑
(4)
𝑾 =
𝑴
𝒑
+
𝑩
𝒑
+
𝑽
𝒑
(5)
𝑽 = 𝑽(𝒀, 𝒓ሻ (6)
𝒀 = 𝑭(𝑲, 𝑵ሻ (7)
𝒘
𝒑
= 𝑭 𝑵 (8)
𝑪 = 𝑪 𝒀 − 𝑻, 𝒓,
𝑽
𝒑
(9)
𝑰 = 𝑰 𝒀, 𝒓,
𝑽
𝒑
(10)

8. THE MACROECONOMIC MODEL
ቤ
𝑑𝑟
𝑑𝑌 𝐼𝑆
=
1 − 𝐶1 − 𝐼1 −
𝐶3 + 𝐼3
𝑝
𝐹 𝑁𝑁
𝐹 𝑁
2 𝑉 + 𝑉𝑌
𝐶2 + 𝐼2 +
𝐶3 + 𝐼3
𝑝
𝑉𝑟
ቤ
𝑑𝑟
𝑑𝑌 𝐿𝑀
= −
𝑀 + 𝑉 𝑚 𝑌 + 𝑀𝑏 𝑌 +
𝑀
𝑀 + 𝐵 + 𝑉
𝑉𝑌
𝑀 + 𝑉 𝑚 𝑟 + 𝑀𝑏 𝑟 +
𝑀
𝑀 + 𝐵 + 𝑉
𝑉𝑟
𝑉𝑌 =
𝜕𝑉
𝜕𝑌
= 𝑓(𝜑ሻ

9. THE MACROECONOMIC MODEL
Conditions for stability are:
a) LM is steeper than IS (necessary condition)
b) IS curve is downward sloping (b and c sufficient conditions)
1 − 𝐶1 − 𝐼1 −
𝐶3+𝐼3
𝑝
𝐹 𝑁𝑁
𝐹 𝑁
2
𝑉
𝑝
+ 𝑉𝑌 > 0
c) LM curve is upward sloping (b and c sufficient conditions)
𝑀 + 𝑉 𝑚 𝑟 + 𝑀𝑏 𝑟 +
𝑀
𝑀 + 𝐵 + 𝑉
𝑉𝑟 < 0

10. CONCLUDING REMARKS
• Equities prices are highly dependent on economic growth, but this dependence is linked to
agents’ speculative mood;
• If uncertainty, rather than risk, is considered essential to asset pricing, speculation plays an
important role on financial markets;
• Depending on agents’ optimism, the development of a speculative bubble is a natural
consequence of agents’ pursuit for short term profits;
• In the proposed model, the influence of output levels on equities prices presented significant
influence on the slope of IS and LM curves;
• In the proposed model, If consumption and investment are considerably affected by equities
price, a speculative bubble will occur if agents are very optimist.

11. THANK YOU !!!
CONTACT:
guilherme.ricardo@ufpr.br
guilherme.fdg@uol.com.br