Asset pricing with expectation shocks

Christopher Elias

Journal of Economic Dynamics and Control, 2016, vol. 65, issue C, 68-82

Abstract: This paper adds persistent shocks into the adaptive learning expectation formation process in stochastic growth asset pricing production and endowment economies. These expectation shocks, designed to capture psychological elements which can arise from news, changes in sentiment, herding and bandwagon effects, generate waves of optimism and pessimism in equity price forecasts. The paper estimates parameters of the expectation shock and adaptive learning process with the method of simulated moments, and compares simulation results to U.S. economic and financial market stylized facts. Numerical results for both the estimated production and endowment economies show that the expectation shock model matches several of the stylized facts better than does a model that assumes rational expectations or adaptive learning alone.

Keywords: Asset pricing; Adaptive learning; Expectations formation; Expectation shocks (search for similar items in EconPapers)
JEL-codes: D83 D84 E37 E44 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:65:y:2016:i:c:p:68-82

DOI: 10.1016/j.jedc.2016.02.005

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