Learning and Asset-price Jumps
We develop a general equilibrium model in which income and dividends are smooth but asset prices contain large moves (jumps). These large price jumps are triggered by optimal decisions of investors to learn the unobserved state. We show that learning choice is determined by preference parameters and the conditional volatility of income process. An important model prediction is that income volatility predicts future jump periods, while income growth does not. Consistent with the model, large moves in returns in the data are predicted by consumption volatility but not by consumption growth. The model quantitatively captures these novel features of the data. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: firstname.lastname@example.org., Oxford University Press.
Volume (Year): 24 (2011)
Issue (Month): 8 ()
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