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Is the market price of risk infinite?

  • Cogley, Timothy

In a Bayesian model, a rational-expectations Euler equation involves a learning wedge that disconnects the consumer's IMRS from the rational-expectations pricing kernel. The wedge is extremely volatile and explains the high volatility of the rational-expectations pricing kernel.

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File URL: http://www.sciencedirect.com/science/article/B6V84-4TSTY6W-2/2/16f58d9a7dd010d71a831f7c04d5bbc3
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 102 (2009)
Issue (Month): 1 (January)
Pages: 13-16

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Handle: RePEc:eee:ecolet:v:102:y:2009:i:1:p:13-16
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-39, November.
  2. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
  3. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April.
  4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  5. Geweke, John, 2001. "A note on some limitations of CRRA utility," Economics Letters, Elsevier, vol. 71(3), pages 341-345, June.
  6. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
  7. Cogley, Timothy & Sargent, Thomas J., 2008. "The market price of risk and the equity premium: A legacy of the Great Depression?," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 454-476, April.
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