Asset Pricing with Fading Memory

Abstract

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.

Reflexivity in Credit Markets

“…The speci…cation for extrapolative beliefs in equation ( 11) is similar to speci…cations in Barberis, Shleifer (2015, 2018), and Nagel and Xu (2018). Empirically, equation ( 11) is motivated by the …ndings in Greenwood and Hanson (2013) who present evidence that credit market investors tend to extrapolate recent credit market outcomes.…”

Recovering Investor Expectations from Demand for Index Funds

“…To validate our results, we compare our estimates to widely used surveys of investor expectations (e.g., the Shiller Index, Gallup, etc.) that are commonly used in the literature (Greenwood and Shleifer, 2014;Nagel and Xu, 2019). Despite the fact that these two approaches draw on different populations and are collected with different methods, we find that our estimates are positively correlated with existing surveys.…”

“…Our demand estimation framework and estimated beliefs complement the findings of Vissing-Jorgensen (2003), Ben-David et al (2013), Amromin and Sharpe (2014), Greenwood and Shleifer (2014), and Nagel and Xu (2019). These papers use survey evidence to better understand investor expectations.…”

An Economy of Neural Networks: Learning from Heterogeneous Experiences

“…At the same time, there is substantial evidence that agents with different experiences do have different expectations even about the most crucial and widely discussed economic or financial 1 variables. For example, Nagel and Xu (2019) find that lifetime inflation experiences effectively predict inflation expectations for individuals in the US. Goldfayn-Frank and Wohlfart (2020) show that East Germans still have higher inflation expectations than West Germans.…”