Parameter learning in general equilibrium: The asset pricing implications

This paper studies the asset pricing implications of parameter learning in general equilibrium macro-finance models. Learning about the structural parameters governing the exogenous endowment process introduces long-run risks in the subjective consumption dynamics, as posterior mean beliefs are martingales and shocks to mean beliefsare permanent. These permanent shocks have particularly strong asset pricing implications for a representative agent with Epstein-Zin preferences and a preference for early resolution of uncertainty. We consider models with unknown parameters governinglong-run economic growth, rare events, as well as learning in models with structural breaks. In all cases, parameter learning generates long-lasting, quantitatively significant additional risks that can help explain standard asset pricing puzzles.