NBER

Zhengyang Xu

Department of Economics and Finance
City University of Hong Kong
9-221, 9/F, LAU, Tat Chee Avenue
Kowloon Tong, Kowloon, Hong Kong SAR

E-Mail: zhengyxu@cityu.edu.hk
Institutional Affiliation: City University of Hong Kong

NBER Working Papers and Publications

September 2019Asset Pricing with Fading Memory
with Stefan Nagel: w26255
Building on evidence that lifetime experiences shape individuals' macroeconomic expectations, we study asset prices in an economy in which a representative agent learns with fading memory about unconditional mean endowment growth. With IID fundamentals, constant risk aversion, and memory decay calibrated to microdata, the model generates a high and strongly counter-cyclical objective equity premium, while the subjective equity premium is virtually constant. Consistent with this theory, experienced payout growth (a weighted average of past growth rates) is negatively related to future stock market excess returns and subjective expectations errors in surveys, and positively to analyst forecasts of long-run earnings growth.

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