Stock Market Volatility and Learning

Klaus Adam, Albert Marcet and Juan Pablo Nicolini

No 12-06, Working Papers from University of Mannheim, Department of Economics

Abstract: We study a standard consumption based asset pricing model with rational investors who entertain subjective prior beliefs about price behavior. Optimal behavior then dictates that investors learn about price behavior from past price observations. We show that this imparts momentum and mean reversion into the equilibrium behavior of the price dividend ratio, similar to what can be observed in the data. Estimating the model on U.S. stock price data using the method of simulated moments, we show that it can quantitatively account for the observed stock price volatility, the persistence of the price-dividend ratio, and the predictability of long-horizon returns. For reasonable degrees of risk aversion, the model also passes a formal statistical test for the overall goodness of fit, provided one excludes the equity premium from the set of moments to be matched.

JEL-codes: D84 G12 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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https://madoc.bib.uni-mannheim.de/31217/4/Stock_Ma ... ity_and_Learning.pdf

Related works:
Journal Article: Stock Market Volatility and Learning (2016)
Working Paper: Stock Market Volatility and Learning (2015)
Working Paper: Stock Market Volatility and Learning (2015)
Working Paper: Stock Market Volatility and Learning (2011)
Working Paper: Stock market volatility and learning (2011)
Working Paper: Stock Market Volatility and Learning (2008)
Working Paper: Stock market volatility and learning (2008)
Working Paper: Stock Market Volatility and Learning (2007)
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