Faculty of Economics and Business Administration Publications Database
Biased Bayesian learning with an application to the risk-free rate puzzle
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Authors: |
Zimper, Alexander
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Source: | |
Volume: | 39 |
Pages: | 79 - 97 |
Month: | February |
ISSN-Print: |
0165-1889 |
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Online Version |
Year: | 2014 |
Keywords: | Ambiguity; Non-additive probability measures; Bayesian learning; Truncated normal distribution; Risk-free rate puzzle |
Abstract: | Based on the axiomatic framework of Choquet decision theory, we develop a closed-form model of Bayesian learning with ambiguous beliefs about the mean of a normal distribution. In contrast to rational models of Bayesian learning the resulting Choquet Bayesian estimator results in a long-run bias that reflects the agent's ambiguity attitudes. By calibrating the standard equilibrium conditions of the consumption based asset pricing model we illustrate that our approach contributes towards a resolution of the risk-free rate puzzle. For a plausible parameterization we obtain a risk-free rate in the range of 3.5–5%. This is 1–2.5% closer to the empirical risk-free rate than according calibrations of the rational expectations model. |
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