Stock Market Volatility and Learning

By Klaus Adam, Albert Marcet, Juan Pablo Nicolini. 2008

322 citations recorded by the source corpus.

Introducing bounded rationality into a standard consumption based asset pricing model with a representative agent and time separable preferences strongly improves empirical performance. Learning causes momentum and mean reversion of returns and thereby excess volatility, persistence of price-dividend ratios, long-horizon return predictability and a risk premium, as in the habit model of Campbell and Cochrane (1999), but for lower risk aversion. This is obtained, even though we restrict consideration to learning schemes that imply only small deviations from full rationality. The findings are robust to the particular learning rule used and the value chosen for the single free parameter introduced by learning, provided agents forecast future stock prices using past information on prices.

Subfields: Economics and Econometrics, Finance

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Citations in the corpus

Listening to Chaotic Whispers: A Deep Learning Framework for News-oriented Stock Trend Prediction (2017, background): “In order for seeking maximized profit, stock investors continuously attempt to predict the future trends of market [20], which, however,isquite challengingduetohighlyvolatileandnon-stationary nature of the market [1].”
Diagnostic Expectations and Stock Returns (2019, background): “…and Subramanyam (1998) and Odean (1998) model investor overconfidence, the tendency of 1 Other papers include Barberis and Shleifer (2003), Glaeser and Nathanson (2015), Hong and Stein (1999), Lakonishok, Shleifer, and Vishny (1994), Marcet and Sargent (1989), and Adam, Marcet, and Nicolini (2016).”
Stock Price Booms and Expected Capital Gains (2017, unknown): “The ratio of non-dividend to dividend income ( ) is chosen to match the average dividend-consumption ratio in the U.S. for 1946- 64These moments are also considered in Adam, Marcet, and Nicolini (2016).”
Behavioral & Experimental Macroeconomics and Policy Analysis: A Complex Systems Approach (2018, methodology): “Adam et al. (2016) estimate an asset pricing model with internally rational agents using quarterly U.S. price-to-dividend ratios 1927:2 to 2012:2.”