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Risk preference and stability under learning

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  • Georges, Christophre

Abstract

We consider a simple market environment in which traders with finite memory update forecasting rules at random intervals by OLS. In this context, changes in the perception of market risk can trigger volatility and bubbles. Consequently, higher degrees of risk response among traders can have a destabilizing effect on price dynamics. We consider the interaction of this effect with memory, the speed of learning, and the nature of the forecasting rules.

Suggested Citation

  • Georges, Christophre, 2015. "Risk preference and stability under learning," Economics Letters, Elsevier, vol. 132(C), pages 105-108.
    • Handle: RePEc:eee:ecolet:v:132:y:2015:i:c:p:105-108
    DOI: 10.1016/j.econlet.2015.04.029
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    References listed on IDEAS

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    1. Honkapohja, Seppo & Mitra, Kaushik, 2003. "Learning with bounded memory in stochastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 27(8), pages 1437-1457, June.
    2. William A. Branch & George W. Evans, 2011. "Learning about Risk and Return: A Simple Model of Bubbles and Crashes," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 159-191, July.
    3. Jean-Michel Grandmont, 1998. "Expectations Formation and Stability of Large Socioeconomic Systems," Econometrica, Econometric Society, vol. 66(4), pages 741-782, July.
    4. Georges, Christophre, 2008. "Bounded memory, overparameterized forecast rules, and instability," Economics Letters, Elsevier, vol. 98(2), pages 129-135, February.
    5. Georges, Christophre, 2008. "Staggered updating in an artificial financial market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2809-2825, September.
    6. LeBaron, Blake, 2012. "Heterogeneous gain learning and the dynamics of asset prices," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 424-445.
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    Cited by:

    1. Georges, Christophre & Pereira, Javier, 2021. "Market stability with machine learning agents," Journal of Economic Dynamics and Control, Elsevier, vol. 122(C).

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    More about this item

    Keywords

    Learning; Expectations; Agent-based modeling;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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