Parameter Learning in General Equilibrium: The Asset Pricing Implications

70 Pages Posted: 10 Dec 2013 Last revised: 13 Dec 2013

See all articles by Pierre Collin-Dufresne

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Michael S. Johannes

Columbia Business School - Finance and Economics

Lars A. Lochstoer

University of California, Los Angeles (UCLA) - Anderson School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: December 2013

Abstract

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, the variance of shocks, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively significant additional macro risks that help explain standard asset pricing puzzles.

Suggested Citation

Collin-Dufresne, Pierre and Johannes, Michael Slater and Lochstoer, Lars A., Parameter Learning in General Equilibrium: The Asset Pricing Implications (December 2013). NBER Working Paper No. w19705. Available at SSRN: https://ssrn.com/abstract=2366019

Pierre Collin-Dufresne (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
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Switzerland

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Michael Slater Johannes

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Lars A. Lochstoer

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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