Title: Asset prices and portfolio choice with learning from experience
Authors: Christian Heyerdahl-Larsen - London Business School (United Kingdom) [presenting]
Paul Ehling - BI Norwegian Business School (Norway)
Alessandro Graniero - BI Norwegian Business School (Norway)
Abstract: Asset prices and portfolio choice with overlapping generations are studied, where the young disregard history to learn from own experience. Disregarding history implies less precise estimates of output growth, which in equilibrium leads the young to increase their investment in risky assets after positive returns, that is, they act as trend chasers. In equilibrium, the risk premium decreases after a positive shock and, therefore, trend chasing young agents lose wealth relative to old agents who behave as contrarians. The learning from experience based bias implies a welfare cost that is larger than that of output fluctuations. Consistent with findings from survey data, the average belief about the risk premium in the economy relates negatively to future excess returns and is smoother than the true risk premium.