Working Paper: NBER ID: w19705
Authors: Pierre Collin-Dufresne; Michael Johannes; Lars A. Lochstoer
Abstract: Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models with unknown parameters governing either long-run economic growth, the variance of shocks, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively significant additional macro risks that help explain standard asset pricing puzzles.
Keywords: parameter learning; asset pricing; general equilibrium; macroeconomic risks
JEL Codes: G00; G01; G10; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Learning about the mean growth rate of consumption (E21) | Long-lasting effects on asset pricing (G19) |
| Shocks to beliefs (D80) | Permanent impacts on the pricing kernel (G19) |
| Parameter learning (C51) | Subjective long-run consumption risks (D15) |
| Subjective long-run consumption risks (D15) | Impact on asset prices (G19) |
| Parameter learning (C51) | Impact on asset prices (G19) |
| Belief updating (D83) | Large shocks to continuation utility (D11) |
| Large shocks to continuation utility (D11) | Increased risk premium and return volatility (G19) |
| Presence of parameter uncertainty in asset pricing models (G19) | High volatility in the price of risk and the equity risk premium (G19) |
| Model uncertainty regarding consumption growth dynamics (D15) | Significant fluctuations in the risk premium and return volatility (G17) |