A representative consumer uses Bayes' law to learn about parameters of several models and to construct probabilities with which to perform ongoing model averaging. The arrival of signals induces the consumer to alter his posterior distribution over models and parameters. The consumer's...

It is generally believed that excessive stock market volatility reflects non-mathematical market expectations that are driven by “irrational exuberance” or “animal spirits”. As shown in this paper, there is an alternative explanation. If ex-ante and ex-post expectations are calculated in...

We consider an exchange economy with two groups of investors with identical CRRA utility function but heterogeneous beliefs. The stochastic central tendency of the dividend drift is not observable. Rational investors learn about it from the dividend drift and a signal, while irrational investors...

Subjective growth expectations matter far less for asset prices than suggested by standard models. Reverse causality contaminates the correlation of growth expectations with prices: prices cause growth expectations. A 1% rise in price raises annual growth expectations 32 basis points. To...

We develop new tests for expectation formation in financial and macroeconomic models under various informational assumptions. Survey data suggests stock price forecasts are not anchored by consumption forecasts and rejects this aspect of the formation of stock price expectations in a wide range...

This paper proposes an heterogenous asset pricing model in which different classes of investors coexist and evolve, switching among strategies over time according to a fitness measure. In the presence of boundedly rational agents, with biased forecasts and trend following rules, rational or...

This paper introduces a new model-free approach to measuring the expectation of market variance using VIX derivatives. This approach shows that VIX derivatives carry different information about future variance than S\&P 500 (SPX) options, especially during the 2008 financial crisis. I find that...