Pessimistic beliefs under rational learning
Subtitle: quantitative implications for the equity premium puzzle
By: by Massimo Guidolin.
Contributors: Federal Reserve Bank of St. Louis.
Series: Working paper ;; 2005-005A; Working paper (Federal Reserve Bank of St. Louis : Online) ;; 2005-005A.
Publisher: Federal Reserve Bank of St. Louis
Published: 2005
Place of publication: [St. Louis, Mo.]
Language: eng
Format: Electronic resource
Subjects: Stocks -- Prices -- Econometric models.
Description: "In the presence of infrequent but observable structural breaks, we show that a model in which the representative agent is on a rational learning path concerning the real consumption growth process can generate high equity premia and low risk-free interest rates.  In fact, when the model is calibrated to U.S. consumption growth data, average risk premia and bond yields similar to those displayed by post- depression (1938-1999) U.S. historical experience are generated for low levels of risk aversion.  Even ruling out pessimistic beliefs, recursive learning inflates the equity premium without requiring a strong curvature of the utility function.  Simulations reveal that other moments of equilibrium asset returns are easily matched, chiefly excess volatility and the presence of ARCH effects.  These findings are robust to a number of details of the simulation experiments, such as the number and dating of the breaks"--Federal Reserve Bank of St. Louis web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 6/24/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.