The Learning Premium

27 Pages Posted: 2 May 2018

See all articles by Maxim Bichuch

Maxim Bichuch

University at Buffalo, SUNY

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Date Written: April 15, 2018

Abstract

We find equilibrium stock prices and interest rates in a representative-agent model where dividend growth is uncertain, but gradually revealed by dividends themselves, while asset prices reflect current information and the potential impact of future knowledge. In addition to the usual premium for risk, stock returns include a learning premium, which reflects the expected change in prices from new information. In the long run, the learning premium vanishes, as prices and interest rates converge to their counterparts in the standard setting with known dividend growth. If both relative risk aversion and elasticity of intertemporal substitution are above one, the model reproduces the increase in price-dividend ratios observed in the past century, and implies that, in the long run, price-dividend ratios may increase a further forty percent above current levels.

Keywords: Equilibrium, Asset Pricing, Filtering, Learning

JEL Classification: G11, G12

Suggested Citation

Bichuch, Maxim and Guasoni, Paolo and Guasoni, Paolo, The Learning Premium (April 15, 2018). Available at SSRN: https://ssrn.com/abstract=3163090 or http://dx.doi.org/10.2139/ssrn.3163090

Maxim Bichuch

University at Buffalo, SUNY ( email )

12 Capen Hall
Buffalo, NY 14260
United States

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

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