Final published version
Licence: CC BY-NC-ND: Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Article number | 103555 |
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<mark>Journal publication date</mark> | 31/05/2024 |
<mark>Journal</mark> | Journal of Monetary Economics |
Volume | 144 |
Publication Status | Published |
Early online date | 15/05/24 |
<mark>Original language</mark> | English |
We examine how parameter learning amplifies the impact of macroeconomic shocks on equity prices and quantities in a standard production economy where a representative agent has Epstein-Zin preferences. An investor observes technology shocks that follow a regime-switching process but does not know the underlying model parameters governing the short-term and long-run perspectives of economic growth. We show that rational belief updating endogenously generates long-run risks that help explain various asset pricing facts, most prominently, dividend yield variance decomposition. The asset pricing implications of endogenous long-run risks depend crucially on the introduction of a procyclical dividend process.