Asset Prices and Portfolio Choice with Learning from Experience

Review of Economic Studies (ReStud), Forthcoming

71 Pages Posted: 14 Jan 2014 Last revised: 10 Aug 2017

See all articles by Paul Ehling

Paul Ehling

BI - Norwegian Business School

Alessandro Graniero

BI Norwegian Business School

Christian Heyerdahl-Larsen

Indiana University - Kelley School of Business - Department of Finance

Date Written: February 1, 2017

Abstract

We study asset prices and portfolio choice with overlapping generations, where the young disregard history to learn from own experience. Disregarding history implies less precise estimates of output growth, which in equilibrium leads the young to increase their investment in risky assets after positive returns, that is, they act as trend chasers. In equilibrium, the risk premium decreases after a positive shock and, therefore, trend chasing young agents lose wealth relative to old agents who behave as contrarians. Consistent with findings from survey data, the average belief about the risk premium in the economy relates negatively to future excess returns and is smoother than the true risk premium.

Keywords: Learning from Experience Based Bias, Trend Chasing, Survey Based versus Objective Risk Premiums

JEL Classification: E2, G10, G11, G12

Suggested Citation

Ehling, Paul and Graniero, Alessandro and Heyerdahl-Larsen, Christian, Asset Prices and Portfolio Choice with Learning from Experience (February 1, 2017). Review of Economic Studies (ReStud), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2378330 or http://dx.doi.org/10.2139/ssrn.2378330

Paul Ehling (Contact Author)

BI - Norwegian Business School ( email )

N-0442 Oslo
Norway
+47 46410505 (Phone)

Alessandro Graniero

BI Norwegian Business School ( email )

Nydalsveien 37
Nydalen
Oslo, N-0442
Norway

Christian Heyerdahl-Larsen

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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