Parameter Learning in Production Economies

65 Pages Posted: 22 Aug 2018 Last revised: 8 Jan 2024

See all articles by Mykola Babiak

Mykola Babiak

Lancaster University Management School

Roman Kozhan

University of Warwick - Warwick Business School

Date Written: January 27, 2021

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.

Keywords: Parameter learning, dividend yield variance decomposition, return predictability, business cycles, Markov switching

JEL Classification: D83, E13, E32, G12

Suggested Citation

Babiak, Mykola and Kozhan, Roman, Parameter Learning in Production Economies (January 27, 2021). Journal of Monetary Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3229707 or http://dx.doi.org/10.2139/ssrn.3229707

Mykola Babiak

Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

HOME PAGE: http://https://sites.google.com/site/mykolababiak/home

Roman Kozhan (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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