Working Paper: CEPR ID: DP7127
Authors: Lubos Pstor; Pietro Veronesi
Abstract: We survey the recent literature on learning in financial markets. Our main theme is that many financial market phenomena that appear puzzling at first sight are easier to understand once we recognize that parameters in financial models are uncertain and subject to learning. We discuss phenomena related to the volatility and predictability of asset returns, stock price bubbles, portfolio choice, mutual fund flows, trading volume, and firm profitability, among others.
Keywords: Bayesian; Bubble; Predictability; Uncertainty; Volatility
JEL Codes: G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Learning (C91) | Stock Return Volatility (G17) |
| Learning (C91) | Predictability of Stock Returns (G17) |
| Underestimating Future Dividend Growth (G35) | Stock Prices Lower than Expected (G19) |
| Stock Prices Lower than Expected (G19) | Higher Future Returns (G17) |
| Past Performance (Y10) | Mutual Fund Flows (G23) |
| Increased Capital Flow into Funds (F21) | Diminished Future Returns (D15) |
| Learning (C91) | Firm Profitability (L21) |
| Realized Profits (G19) | Expectations about Profitability (D84) |
| Expectations about Profitability (D84) | Profitability Post-IPO (G24) |