Model
Digital Document
Publisher
Florida Atlantic University
Description
The key objective of this thesis is to explain how aggregate agent investment behavior, in the presence of a Giffen Good, leads to excess market volatility. The thesis relies on two microeconomic models. The first model demonstrates how, in the presence of a Giffen Good, the demand curve is discontinuous and upward sloping. By analyzing the demand curve, price regions of potential volatility are identified. Using the first model as a foundation, a second model is introduced in which a speculator trades in a dynamic setting. In this dynamic framework, opportunities for profit making by the speculator are identified. The speculative behavior aggravates market volatility.
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