Sunspot

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.



comments powered by Disqus
Hot Definitions
  1. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  2. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  3. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  4. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  5. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  6. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
Trading Center