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. Rational Expectations Theory

    An economic idea that the people in the economy make choices ...
  3. Equilibrium

    The state in which market supply and demand balance each other ...
  4. Fundamentals

    The qualitative and quantitative information that contributes ...
  5. Inflationary Psychology

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

    The field of economics that studies the behavior of the aggregate ...
Related Articles
  1. Fundamental Analysis

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  2. Investing Basics

    Investing During Uncertainty

    The inability to forecast future events can turn the markets upside down. Find out how to stay right-side up.
  3. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  4. Bonds & Fixed Income

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  5. Investing

    What's the difference between macroeconomics and microeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and government decisions. Macroeconomics and microeconomics, and their wide ...
  6. Economics

    What's the relationship between r squared and beta?

    Learn about the relationship between R-squared and Beta. Explore how the concepts are related and often used in conjunction with portfolio Alpha.
  7. Economics

    What are some limitations of the consumer price index (CPI)?

    Explore some of the basic limitations of the widely used economic indicator, the consumer price index, or CPI, and examine the criticism of its accuracy.
  8. Economics

    Is the consumer price index (CPI) a cost of living index?

    Explore the consumer price index (CPI) and understand why it is not an actual cost of living index although it is often identified as one.
  9. Economics

    Where do funds report their r-squared?

    Learn where to find R-squared calculations for mutual funds. Explore R-squared, Alpha and Beta and how these calculations measure securities' performance.
  10. Fundamental Analysis

    How do you calculate r-squared in Excel?

    Calculate R-squared in Microsoft Excel by creating two data ranges to correlate. Use the Correlate formula to correlate both sets of data, or x and y.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center