Parameter Learning in General Equilibrium: The Asset Pricing Implications
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.
We thank David Backus, Mikhail Chernov, Darrell Duffie, Lars Hansen, Espen Henriksen, Stavros Panageas, Stanley Zin, and seminar participants at The Chicago Initiative in Theory and Empirics (CITE conference 2012), Columbia, London School of Economics, NBER SI Asset Pricing meeting 2012, Ohio State, Stanford, UC Davis, UCLA, and the University of Minnesota for helpful comments. Any errors or omissions are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Pierre Collin-Dufresne & Michael Johannes & Lars A. Lochstoer, 2016. "Parameter Learning in General Equilibrium: The Asset Pricing Implications," American Economic Review, vol 106(3), pages 664-698.