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Journal of Finance Vol. 71 No. 2 2016

Learning about Consumption Dynamics

Michael Johannes; Lars A. Lochstoer; YIQUN MOU1,2

1 Michael Johannes and Lars A. Lochstoer are at Columbia Business School, Department of Finance and Economics. Yiqun Mou is at Clarke Capital Management. We would like to thank Francisco Barillas (CEPR Barcelona discussant), Pierre Collin-Dufresne, Kent Daniel, Lars Hansen (AFA discussant), Ľuboš Pa · 2 Michael Johannes and Lars A. Lochstoer are at Columbia Business School, Department of Finance and Economics. Yiqun Mou is at Clarke Capital Management. We would like to thank Francisco Barillas (CEPR Barcelona discussant), Pierre Collin-Dufresne, Kent Daniel, Lars Hansen (AFA discussant), Ľuboš Pást

Abstract

This paper characterizes U.S. consumption dynamics from the perspective of a Bayesian agent who does not know the underlying model structure but learns over time from macroeconomic data. Realistic, high‐dimensional macroeconomic learning problems, which entail parameter, model, and state learning, generate substantially different subjective beliefs about consumption dynamics compared to the standard, full‐information rational expectations benchmark. Beliefs about long‐run dynamics are volatile, with counter‐cyclical conditional volatility, and drift over time. Embedding these beliefs in a standard asset pricing model significantly improves the model's ability to match the stylized facts, as well as the sample path of the market price‐dividend ratio.

DOI
10.1111/jofi.12246
Volume
71
Issue
2
Pages
551-600
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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