Learning from experience in the stock market

Anton Nakov and Galo Nuño Barrau

Journal of Economic Dynamics and Control, 2015, vol. 52, issue C, 224-239

Abstract: New evidence suggests that individuals “learn from experience,” meaning they learn from events occurring during their lives as opposed to the entire history of events. Moreover, they weigh more heavily recent events compared to events occurring in the distant past. This paper analyzes the implications of such learning for stock pricing in a model with finitely lived agents. Individuals learn about the rate of change of the stock price and of dividends using a weighted decreasing-gain algorithm. As a result of waves of optimism and pessimism, the stock price exhibits stochastic fluctuations around the rational expectations equilibrium. Conditional on the historical path of dividends, the model produces a price–dividend ratio which is in line with the evidence for the last century, except for the “dot-com” bubble in the 1990s.

Keywords: Heterogeneous beliefs; Constant-gain learning; OLG; Asset pricing (search for similar items in EconPapers)
JEL-codes: D83 D84 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Learning from Experience in the Stock Market (2014)
Working Paper: Learning from experience in the stock market (2012)
Working Paper: Learning from experience in the stock market (2011)
Working Paper: Learning from experience in the stock market (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:52:y:2015:i:c:p:224-239

DOI: 10.1016/j.jedc.2014.11.017

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