Working Paper: NBER ID: w14646
Authors: Lubos Pastor; 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: No keywords provided
JEL Codes: G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uncertainty about future dividends (g) (D89) | higher stock prices (G12) |
| uncertainty about future dividends (g) (D89) | higher volatility (G17) |
| learning about uncertain parameters (C51) | explaining various financial phenomena (G19) |
| uncertainty about future productivity (D89) | stock price bubbles (G19) |
| learning dynamics (C69) | higher volatility of stock returns than dividends (G35) |
| unexpectedly high dividends (G35) | increasing return volatility (G17) |
| investors' expectations about future profitability adjust downward after an IPO (G24) | post-IPO drop in profitability (G24) |
| higher market-to-book ratios of younger firms (G32) | confirmation of model's prediction about uncertainty (C52) |