Asset Pricing with Disagreement and Uncertainty About the Length of Business Cycles

Daniel Andrei (), Bruce Carlin () and Michael Hasler ()
Additional contact information
Daniel Andrei: Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095
Bruce Carlin: Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095
Michael Hasler: University of Toronto, Toronto, Ontario M5S 3E6, Canada

Management Science, 2019, vol. 67, issue 6, 2900-2923

Abstract: We study an economy with incomplete information in which two agents are uncertain and disagree about the length of business cycles. That is, the agents do not question whether the economy is growing or not, but instead continuously estimate how long economic cycles will last—i.e., they learn about the persistence of fundamentals. Learning about persistence generates high and persistent stock return volatility mostly during recessions, but also (to a smaller extent) during economic booms. Disagreement among agents fluctuates and earns a risk premium. A clear risk–return trade-off appears only when conditioning on the sign and magnitude of disagreement. We confirm these predictions empirically. This paper was accepted by Neng Wang, finance.

Keywords: learning; uncertainty; disagreement; volatility; risk premium (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2017.2904 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:65:y:2019:i:6:p:2900-2923

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().