Learning in Asset Markets
Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: Lars Lochstoer, University of California-Los Angeles
Learning and the Capital Age Premium
AbstractWe introduce imperfect information and parameter learning into a production-based asset pricing model. Our model features slow learning about firms' exposure to aggregate productivity shocks over time. In contrast to a full information case, our framework provides a unified explanation for the stylized empirical features of the cross-section of stocks that differ in capital age: old capital firms (1) have higher capital allocation efficiency; (2) are more exposed to aggregate productivity shocks and, hence, earn higher expected returns, which we refer to as capital age premium; and (3) have shorter cash-flow duration, when compared to young capital firms.
Learning from Interest Rates: Implications for Stock Market Efficiency
AbstractThis paper illustrates how rational investors use information contained in interest rates to learn about stock-market fundamentals. For that purpose, we develop a competitive noisy rational expectation equilibrium model in which the rate of interest is determined endogenously. We demonstrate that the interest rate reveals information about the stock's noisy supply (i.e., about discount rates) which investors then use to extract information from the stock's price about its payout (i.e., about cashflows). Because the strength of this mechanism is increasing in the interest rate, so does stock-price informativeness. As a result, price informativeness improves as the mean bond supply rises which, in turn, leads to a decline in the stock's expected excess return, return volatility and Sharpe ratio. We discuss how fiscal and monetary policies, through their impact on interest rates, affect informational efficiency and other properties of the stock market. We report robust empirical evidence supporting our key predictions.
Reflexivity in Credit Markets
AbstractReflexivity is the idea that investors' biased beliefs affect market outcomes, and that market outcomes in turn affect investors' beliefs. We develop a behavioral model of the credit cycle featuring such a two-way feedback loop. In our model, investors form beliefs about firms' creditworthiness, in part, by extrapolating past default rates. Investor beliefs influence firms' actual creditworthiness because firms that can refinance maturing debt on favorable terms are less likely to default in the short-run---even if fundamentals do not justify investors' generosity. Our model is able to match many features of credit booms and busts, including the imperfect synchronization of credit cycles with the real economy, the negative relationship between past credit growth and the future return on risky bonds, and "clam before the storm" periods in which firm fundamentals have deteriorated but the credit market has not yet turned.
- G1 - General Financial Markets