Working Paper: NBER ID: w24697
Authors: Ulrike Malmendier; Demian Pouzo; Victoria Vanasco
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E03; G02; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macrofinancial shocks (E39) | long-lasting changes in investor beliefs and behaviors (G41) |
| younger cohorts (J19) | react more strongly to macrofinancial shocks (E44) |
| recent positive shocks (E32) | invest more heavily in risky assets (G11) |
| negative shocks (F69) | shift towards older cohorts (J26) |
| increase in young agents (L85) | heightened reliance on recent dividend information for pricing (G19) |
| experience-based learning mechanisms (C90) | excess volatility and return predictability (G17) |