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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

Suggested Citation

  • Nakov, Anton & Nuño, Galo, 2011. "Learning from experience in the stock market," Working Paper Series 1396, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20111396
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    References listed on IDEAS

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    Cited by:

    1. Stefan Nagel & Zhengyang Xu, 2022. "Asset Pricing with Fading Memory [Internal rationality, imperfect market knowledge and asset prices]," Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2190-2245.
    2. Mayer, Alexander, 2023. "Two-step estimation in linear regressions with adaptive learning," Statistics & Probability Letters, Elsevier, vol. 195(C).
    3. Nakov, Anton & Nuño, Galo, 2015. "Learning from experience in the stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 224-239.
    4. Gandré, Pauline, 2015. "Asset prices and information disclosure under recency-biased learning," CEPREMAP Working Papers (Docweb) 1515, CEPREMAP.
    5. Bansal, Avijit & Jacob, Joshy, 2022. "Impact of Price Path on Disposition Bias," Journal of Banking & Finance, Elsevier, vol. 143(C).
    6. Bonam, Dennis & Goy, Gavin, 2019. "Home biased expectations and macroeconomic imbalances in a monetary union," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 25-42.
    7. Lei, Xiaowen, 2019. "Information and Inequality," Journal of Economic Theory, Elsevier, vol. 184(C).
    8. Adem Atmaz & Suleyman Basak, 2018. "Belief Dispersion in the Stock Market," Journal of Finance, American Finance Association, vol. 73(3), pages 1225-1279, June.
    9. Ampudia, Miguel & Ehrmann, Michael, 2017. "Macroeconomic experiences and risk taking of euro area households," European Economic Review, Elsevier, vol. 91(C), pages 146-156.
    10. Gandré, Pauline, 2020. "US stock prices and recency-biased learning in the run-up to the Global Financial Crisis and its aftermath," Journal of International Money and Finance, Elsevier, vol. 104(C).

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    More about this item

    Keywords

    assett pricing; bubbles; heterogeneous agents; Learning from experience; OLG;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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