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Perpetual learning and apparent long memory

Guillaume Chevillon () and Sophocles Mavroeidis

Journal of Economic Dynamics and Control, 2018, vol. 90, issue C, 343-365

Abstract: This paper studies the low frequency dynamics in forward looking models where expectations are formed using perpetual learning such as constant gain least squares. We show that if the coefficient on expectations is sufficiently close to unity, perpetual learning induces strong persistence that is empirically indistinguishable from long memory. We apply this result to present value models of stock prices and exchange rates and find that perpetual learning can explain the long memory observed in the data.

Keywords: Long memory; Consistent expectations; Perpetual learning; Present-value models (search for similar items in EconPapers)
JEL-codes: C1 E3 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.jedc.2018.03.012

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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