Parameter Learning in General Equilibrium: The Asset Pricing Implications

Michael Johannes, Lars Lochstoer and Pierre Collin-Dufresne
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Michael Johannes: Columbia University
Lars Lochstoer: Columbia University
Pierre Collin-Dufresne: Ecole Polytechnique Federale de Lausanne

No 647, 2015 Meeting Papers from Society for Economic Dynamics

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.

Date: 2015
New Economics Papers: this item is included in nep-gro
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