Title: Belief Distortions and Financial Stability: A Continuous-Time Model with Diagnostic Expectations

Speaker: Ei Yang, Associate Professor of the School of Finance, Shanghai University of Finance and Economics; graduated from Boston University with a doctoral degree in economics. His research interests focus on heterogeneity and dynamics in the economy, covering fields such as macroeconomics and finance. His research results have been published in journals such as Journal of Development Economics, Marketing Science and Journal of Banking and Finance.

Abstract: The paper incorporates learning and heterogeneous diagnostic expectations into a continuous-time macroeconomic model with financial intermediaries. Diagnostic expectations cause agents to overreact to recent news, generating waves of sentiment. We study how sentiment and financial frictions interact to shape the full equilibrium dynamics. We show that stronger sentiment across all agents reduces the likelihood of financial crises by shrinking the crisis region, but it also amplifies endogenous risk and increases the risk premium during crises. Moreover, when more productive agents exhibit stronger overreaction to news than less productive agents, the economy becomes more fragile to adverse shocks, and recovers more slowly from financial crises. These findings offer new insights into the interaction between belief distortions and financial stability.

Date & time: 23 May 2025, 09:30 - 11:30

Venue: B310, Block B, Zhixin Building, Central Campus, Shandong University