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Articles 1 - 3 of 3
Full-Text Articles in Social and Behavioral Sciences
Asset Pricing Under Information-Processing Constraints, Yulei Luo, Eric R. Young
Asset Pricing Under Information-Processing Constraints, Yulei Luo, Eric R. Young
Yulei Luo
This paper studies the implications of limited information-processing capacity (also called "rational inattention") for asset pricing in a linear-quadratic permanent income model. We have two main results. First, RI increases the size of the risk adjustment to asset prices by increasing the volatility and persistence of consumption growth. Second, RI increases the expected excess return. Thus, RI has the potential to play an important role in resolving extant asset pricing puzzles.
Rational Inattention, Long-Run Consumption Risk, And Portfolio Choice, Yulei Luo
Rational Inattention, Long-Run Consumption Risk, And Portfolio Choice, Yulei Luo
Yulei Luo
This paper explores how the introduction of rational inattention (RI) -- that agents process information subject to fi…nite channel capacity -- affects optimal consumption and investment decisions in an otherwise standard intertemporal model of portfolio choice. We …first explicitly derive optimal consumption and portfolio rules under RI and then show that introducing RI reduces the optimal share of savings invested in the risky asset because inattentive investors face greater long-run consumption risk. We also show that the investment horizon matters for portfolio allocation in the presence of RI, even if investment opportunities are constant and the utility function of investors …
Risk-Sensitive Consumption And Savings Under Rational Inattention, Yulei Luo, Eric R. Young
Risk-Sensitive Consumption And Savings Under Rational Inattention, Yulei Luo, Eric R. Young
Yulei Luo
This paper studies the consumption-savings behavior of households who have risk-sensitive preferences and suffer from limited information-processing capacity (rational inattention or RI). We first solve the model explicitly and show that RI increases precautionary savings by interacting with income uncertainty and risk-sensitivity. Given the closed-form solutions, we find that the RI model displays a wide range of observational equivalence properties, implying that consumption and savings data cannot distinguish between risk-sensitivity, robustness, or the discount factor, in any combination. We then show that the welfare costs from RI are larger for risk-sensitive households than any other observationally-equivalent settings.