Journal Article

Asset Prices and Portfolio Choice with Learning from Experience

Paul Ehling, Alessandro Graniero and Christian Heyerdahl-Larsen

in The Review of Economic Studies

Volume 85, issue 3, pages 1752-1780
Published in print July 2018 | ISSN: 0034-6527
Published online December 2017 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rdx077
Asset Prices and Portfolio Choice with Learning from Experience

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  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
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Abstract

We study asset prices and portfolio choice with overlapping generations, where the young disregard history to learn from own experience. Disregarding history implies less precise estimates of output growth, which in equilibrium leads the young to increase their investment in risky assets after positive returns, that is, they act as trend chasers. In equilibrium, the risk premium decreases after a positive shock and, therefore, trend chasing young agents lose wealth relative to old agents who behave as contrarians. Consistent with findings from survey data, the average belief about the risk premium in the economy relates negatively to future excess returns and is smoother than the true risk premium.

Keywords: Learning from experience based bias; Trend chasing; Survey based versus objective risk premiums; E2; G10; G11; G12

Journal Article.  14392 words.  Illustrated.

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Economics

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