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Learning from experience in the stock market

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  • Anton Nakov

    ()
    (Banco de España and European Central Bank)

  • Galo Nuño

    ()
    (Banco de España)

Abstract

We study the dynamics of a Lucas-tree model with finitely lived agents who “learn from experience.” Individuals update expectations by Bayesian learning based on observations from their own lifetimes. In this model, the stock price exhibits stochastic boom-and-bust fluctuations around the rational expectations equilibrium. This heterogeneous-agents economy can be approximated by a representative-agent model with constant-gain learning, where the gain parameter is related to the survival rate.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/11/Fich/dt1132e.pdf
File Function: First version, December 2011
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1132.

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Length: 44 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:bde:wpaper:1132

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Keywords: Learning from experience; OLG; asset pricing; bubbles; heterogeneous agents;

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  1. Fabio Milani, 2005. "Expectations, Learning and Macroeconomic Persistence," Macroeconomics, EconWPA 0510022, EconWPA.
  2. A. Meltzer & Peter Ordeshook & Thomas Romer, 1982. "Introduction," Public Choice, Springer, Springer, vol. 39(1), pages 1-3, January.
  3. A. A. Brown & L. C. G. Rogers, 2009. "Heterogeneous Beliefs with Finite-Lived Agents," Papers 0907.4953, arXiv.org.
  4. Klaus Adam & Albert Marcet & Juan Pablo Nicolini, 2013. "Stock Market Volatility and Learning," Working Papers 336, Barcelona Graduate School of Economics.
  5. Stefano Eusepi & Bruce Preston, 2008. "Expectations, Learning And Business Cycle Fluctuations," CAMA Working Papers 2008-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  6. Vives, X., 1990. "How Fast Do Rational Agents Learn?," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 135-90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  7. Carceles-Poveda, Eva & Giannitsarou, Chryssi, 2007. "Adaptive learning in practice," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(8), pages 2659-2697, August.
  8. Klaus Adam & Albert Marcet, 2011. "Internal Rationality, Imperfect Market Knowledge and Asset Prices," CEP Discussion Papers, Centre for Economic Performance, LSE dp1068, Centre for Economic Performance, LSE.
  9. Stefano Eusepi & Bruce Preston, 2008. "Expectations, Learning And Business Cycle Fluctuations," CAMA Working Papers 2008-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Branch William & McGough Bruce, 2004. "Multiple Equilibria in Heterogeneous Expectations Models," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 4(1), pages 1-16, December.
  11. Ulrike Malmendier & Stefan Nagel, 2011. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 373-416.
  12. Honkapohja, Seppo & Mitra, Kaushik, 2002. "Learning stability in economics with heterogeneous agents," Working Paper Series, European Central Bank 0120, European Central Bank.
  13. Blume, L. E. & Bray, M. M. & Easley, D., 1982. "Introduction to the stability of rational expectations equilibrium," Journal of Economic Theory, Elsevier, Elsevier, vol. 26(2), pages 313-317, April.
  14. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
  15. Liam Graham, 2011. "Learning, information and heterogeneity," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201113, Centre for Dynamic Macroeconomic Analysis.
  16. Ferrero, Giuseppe, 2007. "Monetary policy, learning and the speed of convergence," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(9), pages 3006-3041, September.
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