publication . Article . 2010

Asset Return Dynamics and Learning

William A. Branch; George W. Evans;
Open Access
  • Published: 01 Jan 2010 Journal: The Review of Financial Studies, volume 23, issue 4 4, pages 1,651-1,680
Abstract
This article advocates a theory of expectation formation that incorporates many of the central motivations of behavioral finance theory while retaining much of the discipline of the rational expectations approach. We provide a framework in which agents, in an asset pricing model, underparameterize their forecasting model in a spirit similar to Hong, Stein, and Yu (2007) and Barberis, Shleifer, and Vishny (1998), except that the parameters of the forecasting model and the choice of predictor are determined jointly in equilibrium. We show that multiple equilibria can exist even if agents choose only models that maximize (risk-adjusted) expected profits. A real-tim...
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Subjects
free text keywords: Economics and Econometrics, Accounting, Finance, Economics, Behavioral economics, Predictability, Adaptive learning, Capital asset pricing model, Profit (economics), Expectation formation, Rational expectations, Financial economics, Asset return
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