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Learning and Asset-price Jumps

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  • Ravi Bansal
  • Ivan Shaliastovich

Abstract

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: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Ravi Bansal & Ivan Shaliastovich, 2011. "Learning and Asset-price Jumps," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2738-2780.
  • Handle: RePEc:oup:rfinst:v:24:y:2011:i:8:p:2738-2780
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Anisha Ghosh & George M. Constantinides, 2010. "The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth," NBER Working Papers 16183, National Bureau of Economic Research, Inc.
    2. Koulovatianos, Christos & Wieland, Volker, 2011. "Asset pricing under rational learning about rare disasters," IMFS Working Paper Series 46, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    3. Tim Bollerslev & Viktor Todorov & Lai Xu, 2014. "Tail Risk Premia and Return Predictability," CREATES Research Papers 2014-49, Department of Economics and Business Economics, Aarhus University.
    4. Bollerslev, Tim & Todorov, Viktor & Xu, Lai, 2015. "Tail risk premia and return predictability," Journal of Financial Economics, Elsevier, vol. 118(1), pages 113-134.
    5. Poghosyan Tigran, 2012. "Determinants of the Foreign Exchange Risk Premium in the Gulf Cooperation Council Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 7(3), pages 1-26, May.
    6. Hengjie Ai & Ravi Bansal, 2016. "Risk Preferences and The Macro Announcement Premium," NBER Working Papers 22527, National Bureau of Economic Research, Inc.
    7. Shaliastovich, Ivan, 2015. "Learning, confidence, and option prices," Journal of Econometrics, Elsevier, vol. 187(1), pages 18-42.

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