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Learning and the capital age premium

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  • Li, Kai
  • Tsou, Chi-Yang
  • Xu, Chenjie

Abstract

Imperfect information and learning are introduced into a production-based asset pricing model. Our model features slow learning about firms’ exposure to aggregate productivity shocks over time. In contrast to a full information case, our framework provides a unified explanation for the stylized empirical features of the cross-section of stocks that differ in capital age: old capital firms (1) have higher capital allocation efficiency; (2) are more exposed to aggregate productivity shocks and, hence, earn higher expected returns, which we refer to as capital age premium; and (3) have shorter cash-flow duration, when compared with young capital firms.

Suggested Citation

  • Li, Kai & Tsou, Chi-Yang & Xu, Chenjie, 2023. "Learning and the capital age premium," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 76-90.
  • Handle: RePEc:eee:moneco:v:136:y:2023:i:c:p:76-90
    DOI: 10.1016/j.jmoneco.2023.02.001
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    More about this item

    Keywords

    Learning; Capital age; Cross-section of expected returns; Capital misallocation; Cash flow duration;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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