HOW LEARNING IN FINANCIAL-MARKETS GENERATES EXCESS VOLATILITY AND PREDICTABILITY IN STOCK-PRICES

Two of the most discussed anomalies in the financial literature are th e predictability of excess returns and the excess volatility of stock prices. Learning effects on stock price dynamics are an intuitive cand idate to explain these empirical findings: estimation uncertainty may increase volatility of stock prices and an estimate of the dividend gr owth rate that is, say, lower than the ''true'' value tends to increas e the dividend yield and capital gain. Simulations of learning effects in a present value model confirm that learning may help to explain ex cess volatility and predictability of stock returns.