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Parameter Learning in General Equilibrium: The Asset Pricing Implications

Author

Listed:
  • Michael Johannes

    (Columbia University)

  • Lars Lochstoer

    (Columbia University)

  • Pierre Collin-Dufresne

    (Ecole Polytechnique Federale de Lausanne)

Abstract

Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models with unknown parameters governing either long-run economic growth, the variance of shocks, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively significant additional macro risks that help explain standard asset pricing puzzles.

Suggested Citation

  • Michael Johannes & Lars Lochstoer & Pierre Collin-Dufresne, 2015. "Parameter Learning in General Equilibrium: The Asset Pricing Implications," 2015 Meeting Papers 647, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:647
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    References listed on IDEAS

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    4. Alan Guoming Huang & Eric Hughson & J. Chris Leach, 2016. "Generational Asset Pricing, Equity Puzzles, and Cyclicality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 52-71, October.

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