IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/19705.html
   My bibliography  Save this paper

Parameter Learning in General Equilibrium: The Asset Pricing Implications

Author

Listed:
  • Pierre Collin-Dufresne
  • Michael Johannes
  • Lars A. Lochstoer

Abstract

Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models with unknown parameters governing either long-run economic growth, the variance of shocks, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively significant additional macro risks that help explain standard asset pricing puzzles.

Suggested Citation

  • Pierre Collin-Dufresne & Michael Johannes & Lars A. Lochstoer, 2013. "Parameter Learning in General Equilibrium: The Asset Pricing Implications," NBER Working Papers 19705, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19705
    Note: AP EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w19705.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lars Peter Hansen & Thomas J Sargent, 2014. "Beliefs, Doubts and Learning: Valuing Macroeconomic Risk," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 10, pages 331-377, World Scientific Publishing Co. Pte. Ltd..
    2. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
    3. Fabrice Collard & Sujoy Mukerji & Kevin Sheppard & Jean‐Marc Tallon, 2018. "Ambiguity and the historical equity premium," Quantitative Economics, Econometric Society, vol. 9(2), pages 945-993, July.
    4. Klibanoff, Peter & Marinacci, Massimo & Mukerji, Sujoy, 2009. "Recursive smooth ambiguity preferences," Journal of Economic Theory, Elsevier, vol. 144(3), pages 930-976, May.
    5. Gennotte, Gerard, 1986. "Optimal Portfolio Choice under Incomplete Information," Journal of Finance, American Finance Association, vol. 41(3), pages 733-746, July.
    6. Lars Peter Hansen & Thomas J Sargent, 2014. "Fragile Beliefs and the Price of Uncertainty," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 9, pages 293-330, World Scientific Publishing Co. Pte. Ltd..
    7. Lubos Pastor & Pietro Veronesi, 2009. "Learning in Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 361-381, November.
    8. Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, August.
    9. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    10. 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.
    11. Nengjiu Ju & Jianjun Miao, 2012. "Ambiguity, Learning, and Asset Returns," Econometrica, Econometric Society, vol. 80(2), pages 559-591, March.
    12. Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2008. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1653-1687, July.
    13. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    14. Tomasz Strzalecki, 2013. "Temporal Resolution of Uncertainty and Recursive Models of Ambiguity Aversion," Econometrica, Econometric Society, vol. 81(3), pages 1039-1074, May.
    15. Fernando Alvarez & Urban J. Jermann, 2004. "Using Asset Prices to Measure the Cost of Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1223-1256, December.
    16. Allan G. Timmermann, 1993. "How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 1135-1145.
    17. Geweke, John, 2001. "A note on some limitations of CRRA utility," Economics Letters, Elsevier, vol. 71(3), pages 341-345, June.
    18. Franco Modigliani, 1977. "The monetarist controversy; or, should we forsake stabilization policies?," Economic Review, Federal Reserve Bank of San Francisco, issue Spr suppl, pages 27-46.
    19. Fernando Alvarez & Urban J. Jermann, 2005. "Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth," Econometrica, Econometric Society, vol. 73(6), pages 1977-2016, November.
    20. Beeler, Jason & Campbell, John Y., 2012. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," Critical Finance Review, now publishers, vol. 1(1), pages 141-182, January.
    21. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 823-866.
    22. Brandt, M.W.Michael W. & Zeng, Qi & Zhang, Lu, 2004. "Equilibrium stock return dynamics under alternative rules of learning about hidden states," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 1925-1954, September.
    23. Moore, Bartholomew & Schaller, Huntley, 1996. "Learning, regime switches, and equilibrium asset pricing dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 979-1006.
    24. Pastor, Lubos & Veronesi, Pietro, 2006. "Was there a Nasdaq bubble in the late 1990s?," Journal of Financial Economics, Elsevier, vol. 81(1), pages 61-100, July.
    25. Jonathan Lewellen & Jay Shanken, 2002. "Learning, Asset‐Pricing Tests, and Market Efficiency," Journal of Finance, American Finance Association, vol. 57(3), pages 1113-1145, June.
    26. Bakshi, Gurdip & Skoulakis, Georgios, 2010. "Do subjective expectations explain asset pricing puzzles?," Journal of Financial Economics, Elsevier, vol. 98(3), pages 462-477, December.
    27. Ľuboš Pástor, 2000. "Portfolio Selection and Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(1), pages 179-223, February.
    28. Dothan, Michael U & Feldman, David, 1986. "Equilibrium Interest Rates and Multiperiod Bonds in a Partially Observable Economy," Journal of Finance, American Finance Association, vol. 41(2), pages 369-382, June.
    29. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc.
    30. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
    31. Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, vol. 99(1), pages 243-264, March.
    32. Benzoni, Luca & Collin-Dufresne, Pierre & Goldstein, Robert S., 2011. "Explaining asset pricing puzzles associated with the 1987 market crash," Journal of Financial Economics, Elsevier, vol. 101(3), pages 552-573, September.
    33. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    34. Johnson, Timothy C., 2007. "Optimal learning and new technology bubbles," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2486-2511, November.
    35. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, August.
    36. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
    37. Detemple, Jerome B, 1986. "Asset Pricing in a Production Economy with Incomplete Information," Journal of Finance, American Finance Association, vol. 41(2), pages 383-391, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rhys Bidder & Ian Dew-Becker, 2016. "Long-Run Risk Is the Worst-Case Scenario," American Economic Review, American Economic Association, vol. 106(9), pages 2494-2527, September.
    2. Hansen, Lars Peter, 2013. "Uncertainty Outside and Inside Economic Models," Nobel Prize in Economics documents 2013-7, Nobel Prize Committee.
    3. Uppal, Raman & Vilkov, Grigory & Buss, Adrian, 2015. "Where Experience Matters: Asset Allocation and Asset Pricing with Opaque and Illiquid Assets," CEPR Discussion Papers 10437, C.E.P.R. Discussion Papers.
    4. Jerry Tsai & Jessica A. Wachter, 2015. "Disaster Risk and its Implications for Asset Pricing," NBER Working Papers 20926, National Bureau of Economic Research, Inc.
    5. Bidder, R.M. & Smith, M.E., 2018. "Doubts and variability: A robust perspective on exotic consumption series," Journal of Economic Theory, Elsevier, vol. 175(C), pages 689-712.
    6. Guimarães, Rodrigo, 2014. "Expectations, risk premia and information spanning in dynamic term structure model estimation," Bank of England working papers 489, Bank of England.
    7. Lars Peter Hansen, 2014. "Nobel Lecture: Uncertainty Outside and Inside Economic Models," Journal of Political Economy, University of Chicago Press, vol. 122(5), pages 945-987.
    8. Shuo Cao, 2018. "Learning about Term Structure Predictability under Uncertainty," GRU Working Paper Series GRU_2018_006, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    9. Laura Veldkamp & Anna Orlik, 2016. "Understanding Uncertainty Shocks and the Role of the Black Swan," Working Papers 16-04, New York University, Leonard N. Stern School of Business, Department of Economics.
    10. Pakoš, Michal, 2013. "Long-run risk and hidden growth persistence," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1911-1928.
    11. Veldkamp, Laura & Orlik, Anna, 2014. "Understanding Uncertainty Shocks and the Role of Black Swans," CEPR Discussion Papers 10147, C.E.P.R. Discussion Papers.
    12. Ravi Jagannathan & Binying Liu, 2019. "Dividend Dynamics, Learning, and Expected Stock Index Returns," Journal of Finance, American Finance Association, vol. 74(1), pages 401-448, February.
    13. Branger, Nicole & Grüning, Patrick & Kraft, Holger & Meinerding, Christoph, 2013. "Asset pricing under uncertainty about shock propagation," SAFE Working Paper Series 34, Leibniz Institute for Financial Research SAFE.
    14. Rhys M. Bidder & Ian Dew-Becker, 2014. "Long-Run Risk is the Worst-Case Scenario: Ambiguity Aversion and Non-Parametric Estimation of the Endowment Process," Working Paper Series 2014-16, Federal Reserve Bank of San Francisco.
    15. Caines, Colin & Winkler, Fabian, 2021. "Asset price beliefs and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 53-67.
    16. Backus, David & Ferriere, Axelle & Zin, Stanley, 2015. "Risk and ambiguity in models of business cycles," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 42-63.
    17. Colin C. Caines & Fabian Winkler, 2018. "Asset Price Learning and Optimal Monetary Policy," International Finance Discussion Papers 1236, Board of Governors of the Federal Reserve System (U.S.).
    18. Laura Veldkamp & Anna Orlik, 2014. "Uncertainty Shocks and the Role of the Black Swan," 2014 Meeting Papers 275, Society for Economic Dynamics.
    19. Yang Lu & Michael Siemer, 2013. "Learning, Rare Disasters, and Asset Prices," Finance and Economics Discussion Series 2013-85, Board of Governors of the Federal Reserve System (U.S.).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Johannes & Lars Lochstoer & Pierre Collin-Dufresne, 2015. "Parameter Learning in General Equilibrium: The Asset Pricing Implications," 2015 Meeting Papers 647, Society for Economic Dynamics.
    2. Pierre Collin-Dufresne & Michael Johannes & Lars A. Lochstoer, 2016. "Parameter Learning in General Equilibrium: The Asset Pricing Implications," American Economic Review, American Economic Association, vol. 106(3), pages 664-698, March.
    3. Yiqun Mou & Lars A. Lochstoer & Michael Johannes, 2011. "Learning about Consumption Dynamics," 2011 Meeting Papers 306, Society for Economic Dynamics.
    4. Nengjiu Ju & Jianjun Miao, 2012. "Ambiguity, Learning, and Asset Returns," Econometrica, Econometric Society, vol. 80(2), pages 559-591, March.
    5. Emi Nakamura & Dmitriy Sergeyev & Jón Steinsson, 2017. "Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 1-39, January.
    6. Fabrice Collard & Sujoy Mukerji & Kevin Sheppard & Jean‐Marc Tallon, 2018. "Ambiguity and the historical equity premium," Quantitative Economics, Econometric Society, vol. 9(2), pages 945-993, July.
    7. Hui Chen & Nengjiu Ju & Jianjun Miao, 2014. "Dynamic Asset Allocation with Ambiguous Return Predictability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 799-823, October.
    8. Jianjun Miao & Bin Wei & Hao Zhou, 2019. "Ambiguity Aversion and the Variance Premium," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-36, June.
    9. Andrei, Daniel & Carlin, Bruce I., 2023. "Schumpeterian competition in a Lucas economy," Journal of Economic Theory, Elsevier, vol. 208(C).
    10. Sumru Altug & Cem Cakmakli & Fabrice Collard & Sujoy Mukerji & Han Ozsoylev, 2020. "Ambiguous Business Cycles: A Quantitative Assessment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 220-237, October.
    11. Larry G. Epstein & Emmanuel Farhi & Tomasz Strzalecki, 2014. "How Much Would You Pay to Resolve Long-Run Risk?," American Economic Review, American Economic Association, vol. 104(9), pages 2680-2697, September.
    12. Segal, Gill & Shaliastovich, Ivan & Yaron, Amir, 2015. "Good and bad uncertainty: Macroeconomic and financial market implications," Journal of Financial Economics, Elsevier, vol. 117(2), pages 369-397.
    13. Max Gillman & Michal Kejak & Michal Pakoš, 2015. "Learning about Rare Disasters: Implications For Consumption and Asset Prices," Review of Finance, European Finance Association, vol. 19(3), pages 1053-1104.
    14. Jerry Tsai & Jessica A. Wachter, 2015. "Disaster Risk and its Implications for Asset Pricing," NBER Working Papers 20926, National Bureau of Economic Research, Inc.
    15. Ghaderi, Mohammad & Kilic, Mete & Seo, Sang Byung, 2022. "Learning, slowly unfolding disasters, and asset prices," Journal of Financial Economics, Elsevier, vol. 143(1), pages 527-549.
    16. Rhys Bidder & Ian Dew-Becker, 2016. "Long-Run Risk Is the Worst-Case Scenario," American Economic Review, American Economic Association, vol. 106(9), pages 2494-2527, September.
    17. Zhang, Jian & Kong, Dongmin & Liu, Hening & Wu, Ji, 2019. "Asset pricing with time varying pessimism and rare disasters," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 165-175.
    18. Sumru Altug & Cem Cakmakli & Fabrice Collard & Sujoy Mukerji & Han Ozsoylev, 2020. "Ambiguous Business Cycles: A Quantitative Assessment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 220-237, October.
    19. A. Ronald Gallant & Mohammad Jahan-Parvar & Hening Liu, 2015. "Measuring Ambiguity Aversion," Finance and Economics Discussion Series 2015-105, Board of Governors of the Federal Reserve System (U.S.).
    20. Huang, Darien & Kilic, Mete, 2019. "Gold, platinum, and expected stock returns," Journal of Financial Economics, Elsevier, vol. 132(3), pages 50-75.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G00 - Financial Economics - - General - - - General
    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:19705. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.