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Asset Pricing When 'This Time is Different'

Author

Listed:
  • Pierre Collin-Dufresne

    (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and National Bureau of Economic Research (NBER))

  • Michael Johannes

    (Columbia University)

  • Lars A. Lochstoer

    (Columbia Business School)

Abstract

Recent evidence suggests that younger people update beliefs more in response to aggregate shocks than older people. We embed this generational learning bias in an equilibrium model where 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 under-valuation. 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.

Suggested Citation

  • Pierre Collin-Dufresne & Michael Johannes & Lars A. Lochstoer, 2013. "Asset Pricing When 'This Time is Different'," Swiss Finance Institute Research Paper Series 13-73, Swiss Finance Institute, revised Jan 2016.
    • Handle: RePEc:chf:rpseri:rp1373
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    Cited by:

    1. Malmendier, Ulrike & Pouzo, Demian & Vanasco, Victoria, 2020. "Investor experiences and international capital flows," Journal of International Economics, Elsevier, vol. 124(C).
    2. Harjoat S. Bhamra & Raman Uppal, 2019. "Does Household Finance Matter? Small Financial Errors with Large Social Costs," American Economic Review, American Economic Association, vol. 109(3), pages 1116-1154, March.
    3. Ready, Robert C., 2018. "Oil consumption, economic growth, and oil futures: The impact of long-run oil supply uncertainty on asset prices," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 1-26.
    4. Farouq Abdulaziz Masoudy, 2018. "Accurate Evaluation of Asset Pricing Under Uncertainty and Ambiguity of Information," Papers 1801.06966, arXiv.org, revised Mar 2018.
    5. Verdickt, Gertjan, 2020. "Is fertility a leading indicator for stock returns?," Finance Research Letters, Elsevier, vol. 33(C).
    6. Pohl, Walter & Schmedders, Karl & Wilms, Ole, 2021. "Asset pricing with heterogeneous agents and long-run risk," Journal of Financial Economics, Elsevier, vol. 140(3), pages 941-964.
    7. Klishchuk, Bogdan, 2019. "Speculative Trade and Market Newcomers," Rationality and Competition Discussion Paper Series 175, CRC TRR 190 Rationality and Competition.
    8. Radke, Lucas & Wicknig, Florian, 2021. "Experience-Based Heterogeneity in Expectations and Monetary Policy," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242414, Verein für Socialpolitik / German Economic Association.
    9. Lars A. Lochstoer & Tyler Muir, 2022. "Volatility Expectations and Returns," Journal of Finance, American Finance Association, vol. 77(2), pages 1055-1096, April.

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    Keywords

    Asset pricing;

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