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Learning about Consumption Dynamics

  • Yiqun Mou

    (Columbia University)

  • Lars A. Lochstoer

    (Columbia University)

  • Michael Johannes

    (Columbia University)

Registered author(s):

    This paper studies the asset pricing implications of Bayesian learning about the parameters, states, and models determining aggregate consumption dynamics. Our approach is empirical and focuses on the quantitative implications of learning in real-time using post World War II consumption data. We characterize this learning process and provide empirical evidence that revisions in beliefs stemming from parameter and model uncertainty are significantly related to realized aggregate equity returns. Further, we show that beliefs regarding the conditional moments of consumption growth are strongly time-varying and exhibit business cycle and/or long-run fluctuations. Much of the long-run behavior is unanticipated ex ante. We embed these subjective beliefs in a general equilibrium model and find that about half of the post World-War II observed equity market risk premium and much of the observed return predictability are due to unexpected revisions in beliefs about parameters and models governing consumption dynamics.

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    File URL: https://www.economicdynamics.org/meetpapers/2011/paper_306.pdf
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    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 306.

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    Date of creation: 2011
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    Handle: RePEc:red:sed011:306
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
    Fax: 1-314-444-8731
    Web page: http://www.EconomicDynamics.org/society.htm
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