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Asset pricing with incomplete information and fat tails

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  • Bidarkota, Prasad V.
  • Dupoyet, Brice V.
  • McCulloch, J. Huston

Abstract

We study a consumption-based asset pricing model with incomplete information and [alpha]-stable shocks. Incomplete information leads to a non-Gaussian filtering problem. Bayesian updating generates fluctuating confidence in the agents' estimate of the persistent component of the dividends' growth rate. This has the potential to generate time variation in the volatility of model-implied returns, without relying on discrete shifts in the drift rate of dividend growth rates. A test of the model using US consumption data shows that implied returns display significant volatility persistence of a magnitude comparable to that in the data.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 6 (June)
Pages: 1314-1331

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:6:p:1314-1331

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Asset pricing Incomplete information Time-varying volatility Fat tails Stable distributions;

References

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Cited by:
  1. repec:lan:wpaper:2360 is not listed on IDEAS
  2. Zimper, Alexander, 2012. "Asset pricing in a Lucas fruit-tree economy with the best and worst in mind," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 610-628.
  3. Shaliastovich, Ivan & Tauchen, George, 2011. "Pricing of the time-change risks," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 843-858, June.
  4. T M Niguez & I Paya & D Peel & J Perote, 2011. "On the stability of the CRRA utility under high degrees of uncertainty," Working Papers 615773, Lancaster University Management School, Economics Department.
  5. Ñíguez, Trino-Manuel & Paya, Ivan & Peel, David & Perote, Javier, 2012. "On the stability of the constant relative risk aversion (CRRA) utility under high degrees of uncertainty," Economics Letters, Elsevier, vol. 115(2), pages 244-248.
  6. repec:lan:wpaper:2585 is not listed on IDEAS

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