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Learning from experience in the stock market

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  • Nakov, Anton
  • Nuño, Galo

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.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:dyncon:v:52:y:2015:i:c:p:224-239
    DOI: 10.1016/j.jedc.2014.11.017
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    Cited by:

    1. Stefan Nagel & Zhengyang Xu, 2022. "Asset Pricing with Fading Memory," The 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. Adem Atmaz & Suleyman Basak, 2018. "Belief Dispersion in the Stock Market," Journal of Finance, American Finance Association, vol. 73(3), pages 1225-1279, June.
    8. Ampudia, Miguel & Ehrmann, Michael, 2017. "Macroeconomic experiences and risk taking of euro area households," European Economic Review, Elsevier, vol. 91(C), pages 146-156.
    9. Lei, Xiaowen, 2019. "Information and Inequality," Journal of Economic Theory, Elsevier, vol. 184(C).
    10. Duffy, John & Shin, Michael, 2024. "Heterogeneous experience and constant-gain learning," Journal of Economic Dynamics and Control, Elsevier, vol. 164(C).
    11. 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

    Heterogeneous beliefs; Constant-gain learning; OLG; Asset pricing;
    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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