Asset Pricing With Incomplete Information and Fat Tails

Journal of Economic Dynamics and Control, Volume 33, Issue 6, June 2009, Pages 1314-1331

47 Pages Posted: 23 May 2019

See all articles by Prasad V. Bidarkota

Prasad V. Bidarkota

Florida International University (FIU) - Department of Economics

Brice V. Dupoyet

Florida International University - College of Business Administration - Finance

J. Huston Mcculloch

Ohio State University; National Bureau of Economic Research (NBER)

Date Written: March 23, 2009

Abstract

We study a consumption-based asset pricing model with incomplete information and a- stable shocks. Incomplete information leads to a non-Gaussian filtering problem. Bayesian updating generates fluctuating confidence in the agents’ estimate of the persistent component of the dividends’ growth rate. This has the potential to generate time variation in the volatility of model-implied returns, without relying on discrete shifts in the drift rate of dividend growth rates. A test of the model using US consumption data shows that implied returns display significant volatility persistence of a magnitude comparable to that in the data.

Keywords: Asset pricing, Incomplete information, Time-varying volatility, Fat tails, Stable distributions

JEL Classification: G12, G13, E43

Suggested Citation

Bidarkota, Prasad V. and Dupoyet, Brice and McCulloch, J. Huston, Asset Pricing With Incomplete Information and Fat Tails (March 23, 2009). Journal of Economic Dynamics and Control, Volume 33, Issue 6, June 2009, Pages 1314-1331 . Available at SSRN: https://ssrn.com/abstract=3358978

Prasad V. Bidarkota

Florida International University (FIU) - Department of Economics ( email )

University Park, DM 320A
Florida International University
Miami, FL 33199
United States
305-348-6362 (Phone)
305-348-1524 (Fax)

HOME PAGE: http://www.fiu.edu/~bidarkot/

Brice Dupoyet (Contact Author)

Florida International University - College of Business Administration - Finance ( email )

University Park, RB 209 A
11200 SW 8th Street
Miami, FL 33199
United States
305-348-3328 (Phone)
305-348-4245 (Fax)

J. Huston McCulloch

Ohio State University ( email )

410 Arps Hall
1945 N. High Street
Columbus, OH 43210-1172
United States
614-292-0382 (Phone)
614-292-3906 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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