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http://ssrn.com/abstract=120630
 
 

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Regime Shifts and Changing Volatility in Stock Returns: A Rational Expectations Equilibrium Model


Pietro Veronesi


University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

May 1998

Center for Research in Security Prices Working Paper No. 474

Abstract:     
I present an intertemporal asset pricing model of learning to explain the GARCH behavior of stock returns and the intertemporal variation of expected returns. I assume that dividends follow a diffusion process whose drift rate shifts between two unobservable states at random times. I first show that the asset price is increasing and convex in investors' posterior probability of the good state. I then characterize the changes in asset price sensitivity to news, return volatility and expected returns as function of investors' level of uncertainty over the state of the economy.

Number of Pages in PDF File: 49

JEL Classification: G12, G13, G14

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Date posted: September 11, 1998  

Suggested Citation

Veronesi, Pietro, Regime Shifts and Changing Volatility in Stock Returns: A Rational Expectations Equilibrium Model (May 1998). Center for Research in Security Prices Working Paper No. 474. Available at SSRN: http://ssrn.com/abstract=120630 or http://dx.doi.org/10.2139/ssrn.120630

Contact Information

Pietro Veronesi (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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