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Learning about Consumption Dynamics (2010)
| Citations: | 8 - 0 self |
BibTeX
@MISC{Johannes10learningabout,
author = {Michael Johannes and Lars Lochstoer and Yiqun Mou},
title = {Learning about Consumption Dynamics},
year = {2010}
}
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Abstract
This paper studies the asset pricing implications of Bayesian learning about the parameters, states, and models determining aggregate consumption dynamics. Our approach is empirical and focuses on the quantitative implications of learning in real-time using post World War II consumption data. We characterize this learning process and provide empirical evidence that revisions in beliefs stemming from parameter and model uncertainty are signi…cantly related to realized aggregate equity returns. Further, we show that beliefs regarding the conditional moments of consumption growth are strongly time-varying and exhibit business cycle and/or long-run ‡uctuations. Much of the long-run behavior is unanticipated ex ante. We embed these subjective beliefs in a general equilibrium model and …nd that about half of the post World-War II observed equity market risk premium and much of the observed return predictability are due to unexpected revisions in beliefs about parameters and models governing consumption dynamics.
Keyphrases
consumption dynamic learning process unanticipated ex ante quantitative implication conditional moment exhibit business cycle long-run behavior long-run uctuations unexpected revision consumption growth equity market risk premium post world-war ii aggregate consumption dynamic aggregate equity return subjective belief empirical evidence paper study observed return predictability model uncertainty asset pricing implication general equilibrium model
