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Learning about Consumption Dynamics

Author

Listed:
  • Yiqun Mou

    (Columbia University)

  • Lars A. Lochstoer

    (Columbia University)

  • Michael Johannes

    (Columbia University)

Abstract

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.

Suggested Citation

  • Yiqun Mou & Lars A. Lochstoer & Michael Johannes, 2011. "Learning about Consumption Dynamics," 2011 Meeting Papers 306, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:306
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    File URL: https://economicdynamics.org/meetpapers/2011/paper_306.pdf
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    References listed on IDEAS

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    Cited by:

    1. George Constantinides, 2012. "The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth," 2012 Meeting Papers 1197, Society for Economic Dynamics.
    2. 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.

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