Learning and excess volatility

We introduce adaptive learning behavior into a general-equilibrium life-cyc le economy with capital accumulation. Agents form forecasts of the rate of return to capital assets using least-squares autoregressions on past data. We show that, in contrast to the perfect-foresight dynamics, the dynamical system under learning possesses equilibria that are characterized by persis tent excess volatility in returns to capital. We explore a quantitative cas e for these learning equilibria. We use an evolutionary search algorithm to calibrate a version of the system under learning and show that this system can generate data that matches some features of the time-series data for U .S, stock returns and per-capita consumption. We argue that this finding pr ovides support for the hypothesis that the observed excess volatility of as set returns can be explained by changes in investor expectations against a background of relatively small changes in fundamental factors.