Building on evidence that lifetime experiences shape individuals' macroeconomic expectations,
Zhengyang Xu and Stefan Nagel study asset prices in an economy in which a representative agent learns with fading memory about unconditional mean endowment growth. With IID fundamentals, constant risk aversion, and memory decay calibrated to microdata, the model generates a high and strongly countercyclical objective equity premium, while the subjective equity premium is virtually constant. Consistent with this theory, experienced payout growth (a weighted average of past growth rates) is negatively related to future stock market excess returns and subjective expectations errors in surveys, and positively to analysts' forecasts of long-run earnings growth.
Nagel, Stefan; Xu, Zhengyang "Asset Pricing with Fading Memory." May 2022; In: The Review of Financial Studies. Vol. 35, No. 5, pp. 2190-2245
Reference:
https://academic.oup.com/rfs/article/35/5/2190/6345357
