Forthcoming Publication in AER for Prof. Collin-Dufresne
© 2016 EPFL
Professors Pierre Collin-Dufresne from SFI@EPFL, Michael Johannes and Lars Lochstoer, both from Columbia University, have a new forthcoming paper in the prestigious American Economic Review entitled "Parameter Learning in General Equilibrium: The Asset Pricing Implications".
Abstract
Parameter learning strongly amplifes the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models with unknown parameters governing either long-run economic growth, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively signicant additional macro risks that help explain standard asset pricing puzzles.