Learning and Asset-Price Jumps / Ravi Bansal, Ivan Shaliastovich.

Format:

Book

Author/Creator:

Bansal, Ravi.

Contributor:

National Bureau of Economic Research.

Shaliastovich, Ivan.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14814.

NBER working paper series no. w14814

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

We develop a general equilibrium model in which income and dividends are smooth, but asset prices are subject to large moves (jumps). A prominent feature of the model is that the optimal decision of investors to learn the unobserved state triggers large asset-price jumps. We show that the learning choice is critically determined by preference parameters and the conditional volatility of income process. An important prediction of the model is that income volatility predicts future jumps, while the variation in the level of income does not. We find that indeed in the data large moves in returns are predicted by consumption volatility, but not by the changes in the consumption level. We show that the model can quantitatively capture these novel features of the data.

Notes:

Print version record

March 2009.