Finance

Sociology

Capital asset pricing model

Equity (law)

Stock (firearms)

Earnings

Population

Biology

Equity premium puzzle

Financial economics

Epistemology

Endowment

Demography

Risk premium

Engineering

Philosophy

Political science

Econometrics

Paleontology

Economics

Microdata (statistics)

Earnings growth

Stock market

Horse

Monetary economics

Census

Mechanical engineering

Review of Financial Studies

Building on evidence that lifetime experiences shape individuals’ macroeconomic expectations, we 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.

Asset Pricing with Fading Memory