Asset Pricing with Fading Memory

By Stefan Nagel, Zhengyang Xu. The Review of financial studies, 2019

155 citations recorded by the source corpus.

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 countercyclical 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 analysts’ forecasts of long-run earnings growth.

View Paper: https://www.semanticscholar.org/paper/4ba8c9e0024fe21ec9d69f0daa2d9a13fe2a2d3b

Citations in the corpus

• Psychology-based Models of Asset Prices and Trading Volume (2018, unknown): “20See Collin-Dufresne et al. (2016), Ehling et al. (2018), and Nagel and Xu (2018) for other ways of incorporating experience effects into models of asset prices. this judgment, he may bring to mind the past stock market returns that he can remember.”