Finance Papers

Document Type

Journal Article

Date of this Version

2011

Publication Source

Review of Financial Studies

Volume

24

Issue

8

Start Page

2738

Last Page

2780

DOI

10.1093/rfs/hhr023

Abstract

We develop a general equilibrium model in which income and dividends are smooth but asset prices contain large moves (jumps). These large price jumps are triggered by optimal decisions of investors to learn the unobserved state. We show that learning choice is determined by preference parameters and the conditional volatility of income process. An important model prediction is that income volatility predicts future jump periods, while income growth does not. Consistent with the model, large moves in returns in the data are predicted by consumption volatility but not by consumption growth. The model quantitatively captures these novel features of the data.

Copyright/Permission Statement

This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Financial Studies following peer review. The version of record is available online at: http://dx.doi.org/10.1093/rfs/hhr023.

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Date Posted: 27 November 2017

This document has been peer reviewed.