NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Investor Experiences and Financial Market Dynamics

Ulrike Malmendier, Demian Pouzo, Victoria Vanasco

NBER Working Paper No. 24697
Issued in June 2018
NBER Program(s):Asset Pricing, International Finance and Macroeconomics

How do macro-financial shocks affect investor behavior and market dynamics? Recent evidence suggests long-lasting effects of personally experienced outcomes on investor beliefs and investment but also significant differences across older and younger generations. We formalize experience-based learning in an OLG model, where different cross-cohort experiences generate persistent heterogeneity in beliefs, portfolio choices, and trade. The model allows us to characterize a novel link between investor demographics and the dependence of prices on past dividends, while also generating known features of asset prices, such as excess volatility and return predictability. The model produces new implications for the cross-section of asset holdings, trade volume, and investors' heterogeneous responses to recent financial crises, which we show to be in line with the data.

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Document Object Identifier (DOI): 10.3386/w24697

Published: Ulrike Malmendier & Demian Pouzo & Victoria Vanasco, 2019. "Investor Experiences and Financial Market Dynamics," Journal of Financial Economics, .

 
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