Asset pricing with adaptive learning

Eva Carceles-Poveda and Chryssi Giannitsarou

No 25, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: We study the extent to which self-referential adaptive learning can explain stylized asset pricing facts in a general equilibrium framework. In particular, we analyze the effects of recursive least squares and constant gain algorithms in a production economy and a Lucas type endowment economy. We find that recursive least squares learning has almost no effects on asset price behavior, for either model, since the algorithm converges fast to rational expectations. At the other end, constant gain learning may sometimes contribute towards explaining the stock price volatility and the predictability of excess returns in the endowment economy. However, in the production economy the effects of constant gain learning are mitigated by the persistence induced by capital accumulation. We conclude that, contrary to popular belief, standard self-referential learning alone cannot resolve the asset pricing puzzles observed in the data

Keywords: Asset pricing; adaptive learning; excess returns; predictability. (search for similar items in EconPapers)
JEL-codes: D83 D84 G12 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-evo, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Related works:
Journal Article: Asset Pricing with Adaptive Learning (2008)
Working Paper: Asset Pricing with Adaptive Learning (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:25

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