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Equilibrium stock return dynamics under alternative rules of learning about hidden states

Publication ,  Journal Article
Brandt, MW; Zeng, Q; Zhang, L
Published in: Journal of Economic Dynamics and Control
September 1, 2004

We examine the properties of equilibrium stock returns in an economy in which agents need to learn the hidden state of the endowment process. We consider Bayesian and suboptimal learning rules, including near-rational learning, conservatism, representativeness, optimism, and pessimism. Bayesian learning produces realistic variation in the conditional equity risk premium, return volatility, and Sharpe ratio. Alternative learning behaviors alter significantly the level and variation of the conditional return moments. However, when agents are allowed to be conscious of their learning mistakes and to price assets accordingly, the properties of returns under Bayesian and alternative learning rules are virtually indistinguishable. © 2004 Elsevier B.V. All rights reserved.

Duke Scholars

Published In

Journal of Economic Dynamics and Control

DOI

ISSN

0165-1889

Publication Date

September 1, 2004

Volume

28

Issue

10

Start / End Page

1925 / 1954

Related Subject Headings

  • Economics
  • 3803 Economic theory
  • 3802 Econometrics
  • 3502 Banking, finance and investment
  • 1502 Banking, Finance and Investment
  • 1402 Applied Economics
  • 1401 Economic Theory
 

Citation

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Brandt, M. W., Zeng, Q., & Zhang, L. (2004). Equilibrium stock return dynamics under alternative rules of learning about hidden states. Journal of Economic Dynamics and Control, 28(10), 1925–1954. https://doi.org/10.1016/j.jedc.2003.09.003
Brandt, M. W., Q. Zeng, and L. Zhang. “Equilibrium stock return dynamics under alternative rules of learning about hidden states.” Journal of Economic Dynamics and Control 28, no. 10 (September 1, 2004): 1925–54. https://doi.org/10.1016/j.jedc.2003.09.003.
Brandt MW, Zeng Q, Zhang L. Equilibrium stock return dynamics under alternative rules of learning about hidden states. Journal of Economic Dynamics and Control. 2004 Sep 1;28(10):1925–54.
Brandt, M. W., et al. “Equilibrium stock return dynamics under alternative rules of learning about hidden states.” Journal of Economic Dynamics and Control, vol. 28, no. 10, Sept. 2004, pp. 1925–54. Scopus, doi:10.1016/j.jedc.2003.09.003.
Brandt MW, Zeng Q, Zhang L. Equilibrium stock return dynamics under alternative rules of learning about hidden states. Journal of Economic Dynamics and Control. 2004 Sep 1;28(10):1925–1954.
Journal cover image

Published In

Journal of Economic Dynamics and Control

DOI

ISSN

0165-1889

Publication Date

September 1, 2004

Volume

28

Issue

10

Start / End Page

1925 / 1954

Related Subject Headings

  • Economics
  • 3803 Economic theory
  • 3802 Econometrics
  • 3502 Banking, finance and investment
  • 1502 Banking, Finance and Investment
  • 1402 Applied Economics
  • 1401 Economic Theory