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Asset Return Dynamics and Learning Author info | Abstract | Publisher info | Download info | Related research | Statistics Wiliam Branch (University of Californis - Irvine)
George W. Evans () (University of Oregon Economics Department)
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This paper advocates a theory of expectation formation that incorporates many of the central motivations of behavioral finance theory while retaining much of the discipline of the rational expectations approach. We provide a framework in which agents, in an asset pricing model, underparameterize their forecasting model in a spirit similar to Hong, Stein, and Yu (2005) and Barberis, Shleifer, and Vishny (1998), except that the parameters of the forecasting model, and the choice of predictor, are determined jointly in equilibrium. We show that multiple equilibria can exist even if agents choose only models that maximize (risk-adjusted) expected profits. A real-time learning formulation yields endogenous switching between equilibria. We demonstrate that a real-time learning version of the model, calibrated to U.S. stock data, is capable of reproducing many of the salient empirical regularities in excess return dynamics such as under/overreaction, persistence, and volatility clustering.
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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number
2006-14.
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Length: 40
Date of creation: 13 Nov 2006Date of revision:
Handle: RePEc:ore:uoecwp:2006-14Contact details of provider: Postal: 1285 University of Oregon, 435 PLC, Eugene, OR 97403-1285 Phone: (541) 346-4661 Fax: (541) 346-1243 Email: Web page: http://economics.uoregon.edu/ More information through EDIRC
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Keywords: Asset pricing misspecification behavioral finance predictability adaptive learning Other versions of this item:
Find related papers by JEL classification: G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
Albert Marcet & Klaus Adam & Juan Pablo Nicolini, 2008.
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