How Do Experienced Traders Respond to Inflows of Inexperienced Traders? An Experimental Analysis

Eizo Akiyama (), Nobuyuki Hanaki and Ryuichiro Ishikawa

No 1359, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning their uncertain environment. When agents update their beliefs about the parameters that govern the unobserved process driving financial shocks to the leverage ratio, the responses of output and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with actual leverage innovations observed over that period, the learning model predicts a sizeable recession in 2008-10, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the amplification due to learning and, accordingly, that macro-prudential policies enforcing countercyclical leverage dampen the effects of leverage shocks.Classification-JEL: C90, D84.

Keywords: Strategic uncertainty; Experience; Heterogeneity; Experiment; Asset markets. (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013-12-18, Revised 2013-12-18
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: How do experienced traders respond to inflows of inexperienced traders? An experimental analysis (2014)
Working Paper: How do experienced traders respond to inflows of inexperienced traders? An experimental analysis (2014)
Working Paper: How Do Experienced Traders Respond to Inflows of Inexperienced Traders? An Experimental Analysis (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:1359

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