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Asset Prices and Portfolio Choice with Learning from Experience

Author

Listed:
  • Paul Ehling
  • Alessandro Graniero
  • Christian Heyerdahl-Larsen

Abstract

We study asset prices and portfolio choice with overlapping generations, where the young disregard history to learn from own experience. Disregarding history implies less precise estimates of output growth, which in equilibrium leads the young to increase their investment in risky assets after positive returns, that is, they act as trend chasers. In equilibrium, the risk premium decreases after a positive shock and, therefore, trend chasing young agents lose wealth relative to old agents who behave as contrarians. Consistent with findings from survey data, the average belief about the risk premium in the economy relates negatively to future excess returns and is smoother than the true risk premium.

Suggested Citation

  • Paul Ehling & Alessandro Graniero & Christian Heyerdahl-Larsen, 2018. "Asset Prices and Portfolio Choice with Learning from Experience," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(3), pages 1752-1780.
    • Handle: RePEc:oup:restud:v:85:y:2018:i:3:p:1752-1780.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx077
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    Citations

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    Cited by:

    1. Stefan Nagel & Zhengyang Xu, 2022. "Asset Pricing with Fading Memory," The Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2190-2245.
    2. Mathieu Pedemonte & Hiroshi Toma & Esteban Verdugo, 2023. "Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience," Working Papers 23-04, Federal Reserve Bank of Cleveland.
    3. Nicolae B. Gârleanu & Stavros Panageas, 2020. "Heterogeneity and Asset Prices: A Different Approach," NBER Working Papers 26607, National Bureau of Economic Research, Inc.
    4. Jin, Lawrence J. & Sui, Pengfei, 2022. "Asset pricing with return extrapolation," Journal of Financial Economics, Elsevier, vol. 145(2), pages 273-295.
    5. Malmendier, Ulrike & Pouzo, Demian & Vanasco, Victoria, 2020. "Investor experiences and financial market dynamics," Journal of Financial Economics, Elsevier, vol. 136(3), pages 597-622.
    6. Deniz Dutz & Ingrid Huitfeldt & Santiago Lacouture & Magne Mogstad & Alexander Torgovitsky & Winnie van Dijk, 2021. "Selection in Surveys," NBER Working Papers 29549, National Bureau of Economic Research, Inc.
      • Deniz Dutz & Ingrid Huitfeldt & Santiago Lacouture & Magne Mogstad & Alexander Torgovitsky & Winnie van Dijk, 2021. "Selection in Surveys," Discussion Papers 971, Statistics Norway, Research Department.
    7. Anna Blajer-Gołębiewska, 2021. "Individual corporate reputation and perception of collective corporate reputation regarding stock market investments," PLOS ONE, Public Library of Science, vol. 16(9), pages 1-21, September.
    8. Buss, Adrian & Vilkov, Grigory & Uppal, Raman, 2018. "The Implications of Financial Innovation for Capital Markets and Household Welfare," CEPR Discussion Papers 13137, C.E.P.R. Discussion Papers.
    9. Buss, Adrian & Vilkov, Grigory & Uppal, Raman, 2020. "Investor Sophistication and Portfolio Dynamics," CEPR Discussion Papers 15116, C.E.P.R. Discussion Papers.
    10. Stavros Panageas, 2020. "The Implications of Heterogeneity and Inequality for Asset Pricing," NBER Working Papers 26974, National Bureau of Economic Research, Inc.
    11. Radke, Lucas & Wicknig, Florian, 2021. "Experience-Based Heterogeneity in Expectations and Monetary Policy," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242414, Verein für Socialpolitik / German Economic Association.
    12. Uppal, Raman & Vilkov, Grigory & Buss, Adrian, 2015. "Where Experience Matters: Asset Allocation and Asset Pricing with Opaque and Illiquid Assets," CEPR Discussion Papers 10437, C.E.P.R. Discussion Papers.
    13. Malmendier, Ulrike M. & Shen, Leslie, 2020. "Scarred Consumption," CEPR Discussion Papers 14937, C.E.P.R. Discussion Papers.
    14. Christian Heyerdahl-Larsen & Philipp Illeditsch, 2018. "Demand Disagreement," 2018 Meeting Papers 607, Society for Economic Dynamics.
    15. Ulrike Malmendier & Leslie Sheng Shen, 2018. "Scarred Consumption," NBER Working Papers 24696, National Bureau of Economic Research, Inc.
    16. Gagnon-Bartsch, Tristan & Bushong, Benjamin, 2022. "Learning with misattribution of reference dependence," Journal of Economic Theory, Elsevier, vol. 203(C).
    17. Stefanie Schraeder, 2016. "Information Processing and Non-Bayesian Learning in Financial Markets," Review of Finance, European Finance Association, vol. 20(2), pages 823-853.
    18. Heinke, Steve & Olschewski, Sebastian & Rieskamp, Jörg, 2022. "Experiences and Asset Price Dynamics," VfS Annual Conference 2022 (Basel): Big Data in Economics 264017, Verein für Socialpolitik / German Economic Association.
    19. Wang, Hailong & Hu, Duni, 2020. "Disagreement with procyclical beliefs and asset pricing," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    20. Uppal, Raman & Buss, Adrian & Vilkov, Grigory, 2017. "Financial Innovation and Asset Prices," CEPR Discussion Papers 12416, C.E.P.R. Discussion Papers.
    21. Pei Kuang & Renbin Zhang & Tongbin Zhang, 2019. "New Tests of Expectation Formation with Applications to Asset Pricing Models," Discussion Papers 19-05, Department of Economics, University of Birmingham.
    22. Klishchuk, Bogdan, 2019. "Speculative Trade and Market Newcomers," Rationality and Competition Discussion Paper Series 175, CRC TRR 190 Rationality and Competition.

    More about this item

    Keywords

    Learning from experience based bias; Trend chasing; Survey based versus objective risk premiums;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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