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I characterize a dynamic economy under general distributions of households' risk tolerance, endowments, and beliefs about long-term growth. As the economy expands and the stock market rises (a) the fraction of households with declining consumption-share increases; (b) the wealth-share of high risk-tolerant households increases; (c) richer households' wealth display a higher CAPM beta; and (d) households' portfolios change qualitatively. A log-utility investor for instance borrows in contractions but lends in expansions. Variations in uncertainty and expected growth generate trading volume due to risk sharing. Higher uncertainty increases stock prices, risk premiums, volatility, wealth inequality and the dispersion of portfolio holdings, consistently with the events in the late 1990s.

Zonder onderwerpscode: economie

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We survey the recent literature on learning in financial markets. Our main theme is that many financial market phenomena that appear puzzling at first sight are easier to understand once we recognize that parameters in financial models are uncertain and subject to learning. We discuss phenomena related to the volatility and predictability of asset returns, stock price bubbles, portfolio choice, mutual fund flows, trading volume, and firm profitability, among others.

Zonder onderwerpscode: economie

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The relation between the volatility of stocks and bonds and their price valuations is strongly time-varying, both in magnitude and direction, defying traditional asset pricing models and conventional wisdom. We construct and estimate a model in which investors' learning about regular and unusual fundamental states leads to a non-monotonic V-shaped relation between volatilities and prices. Structural forecasts from our model predict future return volatility and covariances with R2 ranging between 40% and 60% at the 1-year horizon. The model's success stems largely from backing out the endogenous and time-varying pro (counter) cyclical weights that investors assign to earnings (inflation) news.

Zonder onderwerpscode: economie

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Investors' option-implied fear measures – implied volatility (ATMIV) and put-call implied volatility ratios (P/C) – lead key macroeconomic variables such as industrial capacity utilization and short term interest rates by up to eight quarters. We show that this interaction between fear indices, real activity, and policy variables arises in an equilibrium model where investors learn about the trend-growth regimes of economic data, and the central bank uses a learning-based Taylor rule. The model endogenously generates several time series properties of option prices including the counter (pro) cyclicality of ATMIV (P/C), the V-shape (inverse V-shape) relation between ATMIV (P/C) and monetary policy variables, the positive relation between the level and absolute changes in ATMIV, and an economically significant amount of time variation in the volatility premium.

Zonder onderwerpscode: economie