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In the data, asset prices exhibit large negative moves at frequencies of about 18 months. These large moves are puzzling as they do not coincide, nor are they followed by any significant moves in the real side of the economy. On the other hand, the author finds that measures of investor's uncertainty about their estimate of future growth have significant information about large moves in returns. The author set-up a recursive-utility based model in which investors learn about the latent expected growth using the cross-section of signals.
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