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Properties of equilibrium asset prices under alternative learning schemes

Listed author(s):
  • Guidolin, Massimo
  • Timmermann, Allan

This paper characterizes equilibrium asset prices under adaptive, rational and Bayesian learning schemes in a model where dividends evolve on a binomial lattice. The properties of equilibrium stock and bond prices under learning are shown to differ significantly compared with prices under full information rational expectations. Learning causes the discount factor and risk-neutral probability measure to become path-dependent and introduces serial correlation and volatility clustering in stock returns. We also derive conditions under which the expected value and volatility of stock prices will be higher under learning than under full information. Finally, we derive restrictions on prior beliefs under which Bayesian and rational learning lead to identical prices and show how the results can be generalized to more complex settings where dividends follow either multi-state i.i.d. distributions or multi-state Markov chains.

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

Volume (Year): 31 (2007)
Issue (Month): 1 (January)
Pages: 161-217

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:1:p:161-217
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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