Mislearning of Factor Risk Premia under Structural Breaks: A Misspecified Bayesian Learning Framework

While asset-pricing models increasingly recognize that factor risk premia are subject to structural change, existing literature typically assumes that investors correctly account for such instability. This paper asks what happens when investors instead learn under a misspecified model that underestimates structural breaks. We propose a minimal Bayesian framework in which this misspecification generates persistent prediction errors and pricing distortions, and we introduce an empirically tractabl