Asset Pricing with Fading Memory

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

View graph of relations


Related Research Unit(s)


Original languageEnglish
Number of pages61
Journal / PublicationThe Review of Financial Studies
Online published7 Aug 2021
Publication statusOnline published - 7 Aug 2021


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.

Bibliographic Note

Information for this record is supplemented by the author(s) concerned.