Asset prices and portfolio choice with learning from experience

Ehling, P, Graniero, A and Heyerdahl-Larsen, C (2018) Asset prices and portfolio choice with learning from experience. Review of Economic Studies, 85 (3). pp. 1752-1780. ISSN 0034-6527 OPEN ACCESS

Abstract

We study asset prices and portfolio choice with overlapping generations, where the young disregard history to learn from own experience. Disregarding history implies less precise estimates of output growth, which in equilibrium leads the young to increase their investment in risky assets after positive returns, that is, they act as trend chasers. In equilibrium, the risk premium decreases after a positive shock and, therefore, trend chasing young agents lose wealth relative to old agents who behave as contrarians. Consistent with findings from survey data, the average belief about the risk premium in the economy relates negatively to future excess returns and is smoother than the true risk premium.

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Item Type: Article
Subject Areas: Finance
Date Deposited: 01 Nov 2017 16:54
Date of first compliant deposit: 21 Dec 2017
Subjects: Portfolio investment
Assets
Learning
Risk
Last Modified: 05 Nov 2024 03:00
URI: https://lbsresearch.london.edu/id/eprint/918
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