Asset Pricing When 'This Time is Different'

70 Pages Posted: 2 Jan 2014 Last revised: 29 Jan 2016

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 Johannes

Columbia University

Lars A. Lochstoer

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

Date Written: January 15, 2016

Abstract

Recent evidence suggests that younger people update beliefs more in response to aggregate shocks than older people. We embed this generational learning bias in an equilibrium model where agents have recursive preferences and are uncertain about exogenous aggregate dynamics. The departure from rational expectations is statistically modest, but generates high average risk premiums varying at `generational' frequencies, a positive relation between past returns and agents' future return forecasts, and substantial and persistent over- and under-valuation. Consistent with the model, the price-dividend ratio is empirically more sensitive to macroeconomic shocks when the fraction of young in the population is higher.

Keywords: Asset pricing

Suggested Citation

Collin-Dufresne, Pierre and Johannes, Michael and Lochstoer, Lars A., Asset Pricing When 'This Time is Different' (January 15, 2016). Swiss Finance Institute Research Paper No. 13-73; Columbia Business School Research Paper No. 14-8. Available at SSRN: https://ssrn.com/abstract=2373495 or http://dx.doi.org/10.2139/ssrn.2373495

Pierre Collin-Dufresne

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
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael Johannes

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Lars A. Lochstoer (Contact Author)

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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