Please use this identifier to cite or link to this item:
Adam, Klaus
Marcet, Albert
Nicolini, Juan Pablo
Year of Publication: 
Series/Report no.: 
Working Paper Series, Department of Economics, University of Mannheim 12-6
We study a standard consumption based asset pricing model with rational investors who entertain subjective prior beliefs about price behavior. Optimal behavior then dictates that investors learn about price behavior from past price observations. We show that this imparts momentum and mean reversion into the equilibrium behavior of the price dividend ratio, similar to what can be observed in the data. Estimating the model on U.S. stock price data using the method of simulated moments, we show that it can quantitatively account for the observed stock price volatility, the persistence of the price-dividend ratio, and the predictability of long-horizon returns. For reasonable degrees of risk aversion, the model also passes a formal statistical test for the overall goodness of fit, provided one excludes the equity premium from the set of moments to be matched.
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
389.21 kB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.