Learning and Asset-Price Jumps

55 Pages Posted: 13 Mar 2009 Last revised: 13 Dec 2011

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Ivan Shaliastovich

University of Wisconsin - Madison

Multiple version iconThere are 2 versions of this paper

Date Written: October 19, 2009

Abstract

We develop a general equilibrium model in which income and dividends are smooth, but asset prices are subject to large moves (jumps). A prominent feature of the model is that the optimal decision of investors to learn the unobserved state triggers large asset-price jumps. We show that the learning choice is critically determined by preference parameters and the conditional volatility of income process. An important prediction of the model is that the conditional volatility of income predicts future jump periods, while the level of income growth does not. We find that indeed in the data large moves in returns are predicted by consumption volatility, but not by the changes in consumption level. We show that the model can quantitatively capture these novel features of the data.

Keywords: Recursive utility, learning, asset price jumps

JEL Classification: G12, C22, D83

Suggested Citation

Bansal, Ravi and Shaliastovich, Ivan, Learning and Asset-Price Jumps (October 19, 2009). Available at SSRN: https://ssrn.com/abstract=1358669 or http://dx.doi.org/10.2139/ssrn.1358669

Ravi Bansal (Contact Author)

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Ivan Shaliastovich

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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