Learning about Risk and Return: A Simple Model of Bubbles and Crashes∗
نویسندگان
چکیده
This paper demonstrates that an asset pricing model with least-squares learning can lead to bubbles and crashes as endogenous responses to the fundamentals driving asset prices. When agents are risk-averse they generate forecasts of the conditional variance of a stock’s return. Recursive updating of the conditional variance and expected return implies two mechanisms through which learning impacts stock prices: occasional shocks may lead agents to lower their risk estimate and increase their expected return, thereby triggering a bubble; along a bubble path recursive estimates of risk will increase and crash the bubble. JEL Classifications: G12; G14; D82; D83
منابع مشابه
Web Appendix to “ Learning about Risk and Return : A Simple Model of Bubbles and Crashes ” by William A . Branch and
Proof of Proposition 1. We use the stochastic approximation results described in Evans and Honkapohja (1998, 2001) and (Marcet and Sargent 1989b). Set γ1,t = γ2,t = t−1 and define zt = pt − θt−1Xt−1 + ut = ( T (θt−1;σt−1)− θt−1 ) Xt−1 − aβσt−1vt + ut. Then (12)-(15) in the main text, for the case of exogenous supply, can be re-written as the equations (20)-(22) in the print Appendix to the pape...
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In an asset-pricing model, risk-averse agents need to forecast the conditional variance of a stock’s return. A near-rational restricted perceptions equilibrium exists in which agents believe prices follow a random walk with a conditional variance that is self-fulfilling. When agents estimate risk in realtime, recurrent bubbles and crashes can arise. These effects are stronger when agents allow ...
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