Sunspot

AAA

DEFINITION of 'Sunspot'

In economics, sunspots are extrinsic random variables upon which participants coordinate their decisions. Extrinsic random variables do not affect economic fundamentals directly, but may have an effect on equilibrium outcomes because they influence expectations. In a proper sunspot equilibrium, the allocation of resources depends on sunspots to a significant extent.


Sunspot models are rational-expectations and general-equilibrium models that explain excess volatility in a system.

INVESTOPEDIA EXPLAINS 'Sunspot'

Uncertainty about economic fundamentals, known as intrinsic uncertainty, is not the only source of volatility in economic outcomes. Market uncertainty can also be driven by extrinsic uncertainty, which includes such variables as market psychology, self-fulfilling prophecies and "animal spirits", collectively known as sunspots.


The concept of sunspot equilibrium was introduced by David Cass and Karl Shell in 1983, with the term 'sunspot' being something of a spoof on the work of the 19th-century economist Jevons, who related the business cycle to the cycle of actual sunspots. Shell notes that the best way to analyze bank runs and related financial-system weaknesses is as a sunspot-equilibrium outcome. The 2008 financial meltdown can be viewed as partly sunspot driven.

RELATED TERMS
  1. Animal Spirits

    A term used by John Maynard Keynes used in one of his economics ...
  2. Equilibrium

    The state in which market supply and demand balance each other ...
  3. Inflationary Psychology

    A state of mind that leads consumers to spend more quickly in ...
  4. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
  5. Fundamentals

    The qualitative and quantitative information that contributes ...
  6. Rational Expectations Theory

    An economic idea that the people in the economy make choices ...
Related Articles
  1. How Influential Economists Changed Our ...
    Fundamental Analysis

    How Influential Economists Changed Our ...

  2. Investing During Uncertainty
    Investing Basics

    Investing During Uncertainty

  3. Explaining The World Through Macroeconomic ...
    Options & Futures

    Explaining The World Through Macroeconomic ...

  4. Can Keynesian Economics Reduce Boom-Bust ...
    Bonds & Fixed Income

    Can Keynesian Economics Reduce Boom-Bust ...

comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
Trading Center