NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Learning and Asset-Price Jumps

Ravi Bansal, Ivan Shaliastovich

NBER Working Paper No. 14814
Issued in March 2009
NBER Program(s):   AP   CF   ME

We develop a general equilibrium model in which income and dividends are smooth, but asset prices are subject to large moves (jumps). A prominent feature of the model is that the optimal decision of investors to learn the unobserved state triggers large asset-price jumps. We show that the learning choice is critically determined by preference parameters and the conditional volatility of income process. An important prediction of the model is that income volatility predicts future jumps, while the variation in the level of income does not. We find that indeed in the data large moves in returns are predicted by consumption volatility, but not by the changes in the consumption level. We show that the model can quantitatively capture these novel features of the data.

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Document Object Identifier (DOI): 10.3386/w14814

Published: Rev. Financ. Stud. (2011) 24 (8): 2738-2780. doi: 10.1093/rfs/hhr023 First published online: April 2, 2011

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