Biased Bayesian learning and the risk-free rate puzzle | Munich Center for the Economics of Aging - MEA
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Publication Series of the MPI for Social Policy

Biased Bayesian learning and the risk-free rate puzzle

Content According to the risk-free rate puzzle the return on safe assets is much lower than predicted by standard representative agent models of consumption based asset pricing. Based on non-additive probability measures arising in Choquet decision theory we develop a closed-form model of Bayesian learning in which the Choquet estimator of the mean consumption growth rate does not converge to its \true" value. It rather expresses a bias that reflects the agent's ambiguity about his estimator. We calibrate the standard equilibrium conditions of the consumption based asset pricing model to demonstrate that our approach contributes to a resolution of the risk-free rate puzzle when the agent's learning process exhibits a moderate degree of ambiguity that is resolved in a pessimistic way.
Publication Details

Alexander Zimper Alexander Ludwig

2009
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