Asset Pricing When 'This Time Is Different'

Recent evidence suggests that younger people update beliefs in response to aggregate shocks more than older people. We embed this generational learning bias in an equilibrium model in which agents have recursive preferences and are uncertain about exogenous aggregate dynamics. The departure from rat...

Full description

Saved in:
Bibliographic Details
Published in:The Review of financial studies 2017-02, Vol.30 (2), p.505-538
Main Authors: Collin-Dufresne, Pierre, Johannes, Michael, Lochstoer, Lars A.
Format: Article
Language:English
Subjects:
Agency theory
Equilibrium
Rates of return
Rational expectations
Risk premiums
Stock prices
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Recent evidence suggests that younger people update beliefs in response to aggregate shocks more than older people. We embed this generational learning bias in an equilibrium model in which agents have recursive preferences and are uncertain about exogenous aggregate dynamics. The departure from rational expectations is statistically modest, but generates high average risk premiums varying at generational frequencies, a positive relation between past returns and agents' future return forecasts, and substantial and persistent over- and undervaluation. Consistent with the model, the price-dividend ratio is empirically more sensitive to macroeconomic shocks when the fraction of young in the population is higher.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhw084