Parameter learning in production economies

Babiak, Mykola and Kozhan, Roman (2024) Parameter learning in production economies. Journal of Monetary Economics, 144: 103555. ISSN 0304-3932

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Abstract

We examine how parameter learning amplifies the impact of macroeconomic shocks on equity prices and quantities in a standard production economy where a representative agent has Epstein-Zin preferences. An investor observes technology shocks that follow a regime-switching process but does not know the underlying model parameters governing the short-term and long-run perspectives of economic growth. We show that rational belief updating endogenously generates long-run risks that help explain various asset pricing facts, most prominently, dividend yield variance decomposition. The asset pricing implications of endogenous long-run risks depend crucially on the introduction of a procyclical dividend process.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Monetary Economics
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2003
Subjects:
?? business cyclesdividend yield variance decompositionmarkov switchingparameter learningreturn predictabilityfinanceeconomics and econometrics ??
ID Code:
220197
Deposited By:
Deposited On:
21 May 2024 08:35
Refereed?:
Yes
Published?:
Published
Last Modified:
31 May 2024 03:00