Parameter learning in production economies

Mykola Babiak and Roman Kozhan

Journal of Monetary Economics, 2024, vol. 144, issue C

Abstract: We examine how parameter learning amplifies the impact of macroeconomic shocks on equity prices and quantities in a standard production economy where a representative agent has Epstein-Zin preferences. An investor observes technology shocks that follow a regime-switching process but does not know the underlying model parameters governing the short-term and long-run perspectives of economic growth. We show that rational belief updating endogenously generates long-run risks that help explain various asset pricing facts, most prominently, dividend yield variance decomposition. The asset pricing implications of endogenous long-run risks depend crucially on the introduction of a procyclical dividend process.

Keywords: Parameter learning; Dividend yield variance decomposition; Return predictability; Business cycles; Markov switching (search for similar items in EconPapers)
JEL-codes: D83 E13 E32 G12 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:144:y:2024:i:c:s0304393224000084

DOI: 10.1016/j.jmoneco.2024.103555

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