TY - UNPD
A1 - Koulovatianos, Christos
A1 - Wieland, Volker
T1 - Asset pricing under rational learning about rare disasters : [Version 28 Juli 2011]
T2 - Working paper series / Institute for Monetary and Financial Stability ; 46
N2 - This paper proposes a new approach for modeling investor fear after rare disasters. The key element is to take into account that investorsâ€™ information about fundamentals driving rare downward jumps in the dividend process is not perfect. Bayesian learning implies that beliefs about the likelihood of rare disasters drop to a much more pessimistic level once a disaster has occurred. Such a shift in beliefs can trigger massive declines in price-dividend ratios. Pessimistic beliefs persist for some time. Thus, belief dynamics are a source of apparent excess volatility relative to a rational expectations benchmark. Due to the low frequency of disasters, even an infinitely-lived investor will remain uncertain about the exact probability. Our analysis is conducted in continuous time and offers closed-form solutions for asset prices. We distinguish between rational and adaptive Bayesian learning. Rational learners account for the possibility of future changes in beliefs in determining their demand for risky assets, while adaptive learners take beliefs as given. Thus, risky assets tend to be lower-valued and price-dividend ratios vary less under adaptive versus rational learning for identical priors. Keywords: beliefs, Bayesian learning, controlled diffusions and jump processes, learning about jumps, adaptive learning, rational learning. JEL classification: D83, G11, C11, D91, E21, D81, C61
T3 - Working Paper Series : Institute for Monetary and Financial Stability - 46
KW - beliefs
KW - Bayesian learning
KW - controlled diffusions and jump processes
KW - learning about jumps
KW - adaptive learning
KW - rational learning
KW - Bayes-Lernen
KW - Capital-Asset-Pricing-Modell
Y1 - 2011
UR - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/22698
UR - http://nbn-resolving.de/urn/resolver.pl?urn:nbn:de:hebis:30-115309
UR - http://www.imfs-frankfurt.de/fileadmin/user_upload/pdf/wp_46_2011_koulovatianos_wieland_end.pdf
IS - Version 28 Juli 2011
ER -