Parameter Learning in General Equilibrium: The Asset Pricing Implications
45 Pages Posted: 18 Mar 2012 Last revised: 19 Sep 2015
Date Written: September 18, 2015
Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models with unknown parameters governing either long-run economic growth, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively significant additional macro risks that help explain standard asset pricing puzzles.
Keywords: Parameter learning, asset pricing, general equilibrium
JEL Classification: G12
Suggested Citation: Suggested Citation