Parameter Learning in Production Economies

Mykola Babiak and Roman Kozhan

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: We examine how parameter learning amplifies the impact of macroeconomic shocks on equity prices and quantities in a standard production economy where a representative agent has Epstein-Zin preferences. An investor observes technology shocks that follow a regime-switching process, but does not know the underlying model parameters governing the short-term and long-run perspectives of economic growth. We show that rational parameter learning endogenously generates longrun productivity and consumption risks that help explain a wide array of dynamic pricing phenomena. The asset pricing implications of subjective long-run risks crucially depend on the introduction of a procyclical dividend process consistent with the data.

Keywords: parameter learning; equity premium; business cycles; Markov switching (search for similar items in EconPapers)
JEL-codes: D83 E13 E32 G12 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp640

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