Financial Math Seminar: Maxim Bichuch (JHU) @ Whitehead 304
Title: The Learning Premium
Abstract: We find equilibrium stock prices and interest rates in a
representative-agent model with uncertain dividends’ growth, gradually
revealed by dividends themselves, where asset prices are rational –
reflect current information and anticipate the impact of future
knowledge on future prices. In addition to the usual premium for risk,
stock returns include a learning premium, which reflects the expected
change in prices from new information. In the long run, the learning
premium vanishes, as prices and interest rates converge to their
counterparts in the standard setting with known growth. The model
explains the increase in price-dividend ratios of the past century if
both relative risk aversion and elasticity of intertemporal
substitution are above one. This is a joint work with Paolo Guasoni.