Learning and Asset Prices Under Ambiguous Information

Posted: 15 Dec 2008

See all articles by Markus Leippold

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Fabio Trojani

Swiss Finance Institute; University of Geneva

Paolo Vanini

University of Basel

Multiple version iconThere are 2 versions of this paper

Date Written: November 2008

Abstract

In a Lucas exchange economy with standard power utility, we study asset prices under learning and ambiguous information. In contrast with models featuring only learning or ambiguity, our model is successful in matching the equity premium, the interest rate, and the volatility of stock returns under empirically reasonable parameters. Our closed-form formulas also show that a severe downward bias arises in the empirical relation between stock returns and return volatility. We quantify this bias in simulations and show that our model can explain why such a relation is difficult to detect in the data.

Keywords: G1, G11, G12

Suggested Citation

Leippold, Markus and Trojani, Fabio and Vanini, Paolo, Learning and Asset Prices Under Ambiguous Information (November 2008). The Review of Financial Studies, Vol. 21, Issue 6, pp. 2565-2597, 2008, Available at SSRN: https://ssrn.com/abstract=1315606 or http://dx.doi.org/10.1093/rfs/hhm035

Markus Leippold (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva, Geneva
Switzerland

Paolo Vanini

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

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