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Learning from experience in the stock market

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  • Nakov, Anton
  • Nuño, Galo

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. JEL Classification: G12, D83, D84

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1396.

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Date of creation: Nov 2011
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Handle: RePEc:ecb:ecbwps:20111396

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Keywords: assett pricing; bubbles; Heterogeneous Agents; Learning from experience; OLG;

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  1. Carceles-Poveda, Eva & Giannitsarou, Chryssi, 2007. "Adaptive learning in practice," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2659-2697, August.
  2. Branch William & McGough Bruce, 2004. "Multiple Equilibria in Heterogeneous Expectations Models," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-16, December.
  3. Klaus Adam & Albert Marcet, 2011. "Internal Rationality, Imperfect Market Knowledge and Asset Prices," CEP Discussion Papers dp1068, Centre for Economic Performance, LSE.
  4. Klaus Adam & Albert Marcet & Juan Pablo Nicolini, 2013. "Stock Market Volatility and Learning," Working Papers 336, Barcelona Graduate School of Economics.
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  6. Vives, X., 1990. "How Fast Do Rational Agents Learn?," UFAE and IAE Working Papers 135-90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  7. Stefano Eusepi & Bruce Preston, 2008. "Expectations, Learning and Business Cycle Fluctuations," NBER Working Papers 14181, National Bureau of Economic Research, Inc.
  8. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
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  10. A. Meltzer & Peter Ordeshook & Thomas Romer, 1982. "Introduction," Public Choice, Springer, vol. 39(1), pages 1-3, January.
  11. A. A. Brown & L. C. G. Rogers, 2009. "Heterogeneous Beliefs with Finite-Lived Agents," Papers 0907.4953, arXiv.org.
  12. Ferrero, Giuseppe, 2007. "Monetary policy, learning and the speed of convergence," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3006-3041, September.
  13. 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.
  14. Liam Graham, 2011. "Learning, information and heterogeneity," CDMA Working Paper Series 201113, Centre for Dynamic Macroeconomic Analysis.
  15. Blume, L. E. & Bray, M. M. & Easley, D., 1982. "Introduction to the stability of rational expectations equilibrium," Journal of Economic Theory, Elsevier, vol. 26(2), pages 313-317, April.
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