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Asset Pricing When ‘This Time Is Different’

Author

Listed:
  • Pierre Collin-Dufresne
  • Michael Johannes
  • Lars A. Lochstoer

Abstract

Recent evidence suggests that younger people update beliefs in response to aggregate shocks more than older people. We embed this generational learning bias in an equilibrium model in which agents have recursive preferences and are uncertain about exogenous aggregate dynamics. The departure from rational expectations is statistically modest, but generates high average risk premiums varying at generational frequencies, a positive relation between past returns and agents’ future return forecasts, and substantial and persistent over- and undervaluation. Consistent with the model, the price-dividend ratio is empirically more sensitive to macroeconomic shocks when the fraction of young in the population is higher.Received September 14, 2015; editorial decision March 10, 2016 by Editor Stefan Nagel

Suggested Citation

  • Pierre Collin-Dufresne & Michael Johannes & Lars A. Lochstoer, 2017. "Asset Pricing When ‘This Time Is Different’," The Review of Financial Studies, Society for Financial Studies, vol. 30(2), pages 505-535.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:2:p:505-535.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw084
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    Citations

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    Cited by:

    1. Mohrschladt, Hannes, 2021. "The ordering of historical returns and the cross-section of subsequent returns," Journal of Banking & Finance, Elsevier, vol. 125(C).
    2. Mathieu Pedemonte & Hiroshi Toma & Esteban Verdugo, 2023. "Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience," Working Papers 23-04, Federal Reserve Bank of Cleveland.
    3. Malmendier, Ulrike & Pouzo, Demian & Vanasco, Victoria, 2020. "Investor experiences and financial market dynamics," Journal of Financial Economics, Elsevier, vol. 136(3), pages 597-622.
    4. Chien-Wen Yang & Fang-Ni Chu & Wan-I Chen & Ming-Chi Chen, 2022. "Willingness to Purchase a House during Economic Lost Decades in Japanese Urban Housing Market," International Real Estate Review, Global Social Science Institute, vol. 25(3), pages 333-370.
    5. Nagel, Stefan & Xu, Zhengyang, 2023. "Dynamics of subjective risk premia," Journal of Financial Economics, Elsevier, vol. 150(2).
    6. Branger, Nicole & Konermann, Patrick & Schlag, Christian, 2019. "Optimists and pessimists in (in)complete markets," SAFE Working Paper Series 252, Leibniz Institute for Financial Research SAFE.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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