This paper demonstrates that an asset pricing model with least-squares
learning can lead to bubbles and crashes as endogenous responses to the fundamentals driving asset prices. When agents are risk-averse they need to make forecasts of the conditional variance of a stock's return. Recursive updating of both the conditional variance and the expected return implies several mechanisms through which
learning impacts stock prices. Extended periods of excess volatility, bubbles, and crashes arise with a frequency that depends on the extent to which past data is discounted. A central role is played by changes over time in agents' estimates of risk. (JEL D81, D83, E32,
Branch, William A., and George W. Evans.
"Learning about Risk and Return: A Simple Model of Bubbles and Crashes."
American Economic Journal: Macroeconomics,
Criteria for Decision-Making under Risk and Uncertainty
Search; Learning; Information and Knowledge; Communication; Belief
Business Fluctuations; Cycles
Asset Pricing; Trading volume; Bond Interest Rates