Properties of equilibrium asset prices under alternative learning schemes

Massimo Guidolin and Allan Timmerman

No 2005-009, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper characterizes equilibrium asset prices under adaptive, rational and Bayesian learning schemes in a model where dividends evolve on a binomial lattice. The properties of equilibrium stock and bond prices under learning are shown to differ significantly compared with prices under full information rational expectations. Learning causes the discount factor and risk-neutral probability measure to become path-dependent and introduces serial correlation and volatility clustering in stock returns. We also derive conditions under which the expected value and volatility of stock prices will be higher under learning than under full information. Finally, we derive restrictions on prior beliefs under which Bayesian and rational learning lead to identical prices and show how the results can be generalized to more complex settings where dividends follow either multi-state i.i.d. distributions or multi-state Markov chains.

Keywords: Assets (Accounting); Rational expectations (Economic theory) (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-evo and nep-fin
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Citations: View citations in EconPapers (5)

Published in Journal of Economic Dynamics and Control, January 2007, 31(1)

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Journal Article: Properties of equilibrium asset prices under alternative learning schemes (2007)
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