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Asset pricing under information-processing constraints

  • Luo, Yulei
  • Young, Eric R.

This paper studies the implications of rational inattention (RI) for asset pricing in a LQ-PIH model. We find that RI increases the size of risk adjustment to asset prices and expected excess returns, which helps resolve extant asset pricing puzzles.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165-1765(09)00410-8
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 107 (2010)
Issue (Month): 1 (April)
Pages: 26-29

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Handle: RePEc:eee:ecolet:v:107:y:2010:i:1:p:26-29
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  3. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
  4. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  5. Luo Yulei & Young Eric R, 2009. "Rational Inattention and Aggregate Fluctuations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-43, April.
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