Asset pricing under information-processing constraints
AbstractThis paper studies the implications of rational inattention (RI) for asset pricing in a LQ-PIH model. We find that RI increases the size of risk adjustment to asset prices and expected excess returns, which helps resolve extant asset pricing puzzles.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 107 (2010)
Issue (Month): 1 (April)
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Web page: http://www.elsevier.com/locate/ecolet
Rational inattention Asset pricing Permanent income;
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- Yulei Luo, 2008.
"Consumption Dynamics under Information Processing Constraints,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
- Yulei Luo, 2005. "Consumption Dynamics under Information Processing Constraints," Macroeconomics 0505011, EconWPA, revised 03 Jun 2005.
- Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
- Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Luo Yulei & Young Eric R, 2009. "Rational Inattention and Aggregate Fluctuations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-43, April.
- Luo, Yulei & Young, Eric, 2013. "Rational Inattention in Macroeconomics: A Survey," MPRA Paper 54267, University Library of Munich, Germany.
- Luo, Yulei & Young, Eric, 2013. "Long-run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention," MPRA Paper 52904, University Library of Munich, Germany.
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