Recursive preferences, learning and large deviations

- An asset pricing model with recursive preferences is specified.
- The model is estimated under the assumption of adaptive learning.
- Both of these sources of volatility account for fluctuations in liquid stock markets.
- However, only risk aversion matters for illiquid housing markets.

We estimate the relative contribution of recursive preferences versus adaptive learning in accounting for the tail thickness of price-dividends/rents ratios. We find that both of these sources of volatility account for volatility in liquid (stocks) but not illiquid (housing) assets.