Learning and Asset-Price Jumps

Ravi Bansal and Ivan Shaliastovich

No 14814, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a general equilibrium model in which income and dividends are smooth, but asset prices are subject to large moves (jumps). A prominent feature of the model is that the optimal decision of investors to learn the unobserved state triggers large asset-price jumps. We show that the learning choice is critically determined by preference parameters and the conditional volatility of income process. An important prediction of the model is that income volatility predicts future jumps, while the variation in the level of income does not. We find that indeed in the data large moves in returns are predicted by consumption volatility, but not by the changes in the consumption level. We show that the model can quantitatively capture these novel features of the data.

JEL-codes: E0 E4 E44 G0 G1 G12 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Note: AP CF ME
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Citations: View citations in EconPapers (3)

Published as Ravi Bansal & Ivan Shaliastovich, 2011. "Learning and Asset-price Jumps," Review of Financial Studies, vol 24(8), pages 2738-2780.

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Journal Article: Learning and Asset-price Jumps (2011)
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