The Learning Premium

We find equilibrium stock prices and interest rates in a representative-agent model with uncertain dividends' growth, gradually revealed by dividends themselves, where asset prices are rational -- reflect current... [ view full abstract ]

We find equilibrium stock prices and interest rates in a representative-agent model with uncertain dividends' growth, gradually revealed by dividends themselves, where asset prices are rational -- reflect current information and anticipate the impact of future knowledge on future prices. In addition to the usual risk-premium, stock returns include a learning premium, which reflects the expected change in prices from new information. In the long run, the learning premium vanishes, as prices and interest rates converge to their counterparts in the standard setting with known growth. The model helps explains the increase in price-dividend ratios of the past century.