Properties of equilibrium asset prices under alternative learning schemes

Massimo Guidolin, Allan Timmermann

Research output: Contribution to journalArticlepeer-review


This paper characterizes equilibrium asset prices under adaptive, rational and Bayesian learning schemes in a model where dividends evolve on a binomial lattice. The properties of equilibrium stock and bond prices under learning are shown to differ significantly. Learning causes the discount factor and risk-neutral probability measure to become path-dependent and introduces serial correlation and volatility clustering in stock returns. We also derive conditions under which the expected value and volatility of stock prices will be higher under learning than under full information. Finally, we investigate restrictions on prior beliefs under which Bayesian and rational learning lead to identical prices and show how the results can be generalized to more complex settings where dividends follow either multi-state i.i.d. distributions or multi-state Markov chains. © 2006 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)161-217
Number of pages56
JournalJournal of Economic Dynamics and Control
Issue number1
Publication statusPublished - Jan 2007


  • Adaptive learning
  • Asset prices
  • Bayesian updating
  • Lattice models
  • Rational learning


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