Simple Forecasts and Paradigm Shifts

@inproceedings{Hong2003SimpleFA,
  title={Simple Forecasts and Paradigm Shifts},
  author={Harrison Hong},
  year={2003}
}
We study the asset pricing implications of learning in an environment in which the true model of the world is a multivariate one, but agents update only over the class of simple univariate models. Thus, if a particular simple model does a poor job of forecasting over a period of time, it is discarded in favor of an alternative simple model. The theory yields a number of distinctive predictions for stock returns, generating forecastable variation in the magnitude of the value-glamour return… CONTINUE READING
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