Working Paper: NBER ID: w26255
Authors: Stefan Nagel; Zhengyang Xu
Abstract: Building on evidence that lifetime experiences shape individuals' macroeconomic expectations, we study asset prices in an economy in which a representative agent learns with fading memory about unconditional mean endowment growth. With IID fundamentals, constant risk aversion, and memory decay calibrated to microdata, the model generates a high and strongly counter-cyclical objective equity premium, while the subjective equity premium is virtually constant. Consistent with this theory, experienced payout growth (a weighted average of past growth rates) is negatively related to future stock market excess returns and subjective expectations errors in surveys, and positively to analyst forecasts of long-run earnings growth.
Keywords: Asset Pricing; Fading Memory; Equity Premium; Learning; Expectations
JEL Codes: E03; G12; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| experienced payout growth (G35) | future stock market excess returns (G17) |
| subjective expectations of stock market returns (G17) | experienced payout growth (G35) |
| experienced payout growth (G35) | subjective expectations of long-term growth (E66) |
| subjective expectations of long-term growth (E66) | experienced payout growth (G35) |