Asset Pricing with Disagreement and Uncertainty about the Length of Business Cycles

Management Science

50 Pages Posted: 20 Sep 2017 Last revised: 7 Aug 2020

See all articles by Daniel Andrei

Daniel Andrei

McGill University; Desautels Faculty of Management

Bruce I. Carlin

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

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Date Written: July 24, 2017

Abstract

We study an economy with incomplete information in which two agents are uncertain and disagree about the length of business cycles. That is, the agents do not question whether the economy is growing or not, but instead continuously estimate how long economic cycles will last — i.e., they learn about the persistence of fundamentals. Learning about persistence generates high and persistent stock return volatility mostly during recessions, but also (to a smaller extent) during economic booms. Disagreement among agents fluctuates and earns a risk premium. A clear risk-return tradeoff appears only when conditioning on the sign and magnitude of disagreement. We confirm these predictions empirically.

Keywords: Learning, Uncertainty, Disagreement, Volatility, Risk Premium

JEL Classification: D51, D83, G12, G14

Suggested Citation

Andrei, Daniel and Carlin, Bruce I. and Hasler, Michael, Asset Pricing with Disagreement and Uncertainty about the Length of Business Cycles (July 24, 2017). Management Science, Available at SSRN: https://ssrn.com/abstract=3038497 or http://dx.doi.org/10.2139/ssrn.3038497

Daniel Andrei (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Desautels Faculty of Management ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Bruce I. Carlin

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

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

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

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