5,790 research outputs found

    From Efficient Market Theory to Behavioral Finance

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    The efficient markets theory reached the height of its dominance in academic circles around the 1970s. Faith in this theory was eroded by a succession of discoveries of anomalies, many in the 1980s, and of evidence of excess volatility of returns. Finance literature in this decade and after suggests a more nuanced view of the value of the efficient markets theory, and, starting in the 1990s, a blossoming of research on behavioral finance. Some important developments in the 1990s and recently include feedback theories, models of the interaction of smart money with ordinary investors, and evidence on obstacles to smart money.Speculative markets, Rational expectations, Psychology, Anomalies, Excess volatility, Feedback, Smart money, Limits to arbitrage, Short sales

    Learning from experience in the stock market

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    We study the dynamics of a Lucas-tree model with finitely lived agents who "learn from experience." Individuals update expectations by Bayesian learning based on observations from their own lifetimes. In this model, the stock price exhibits stochastic boom-and-bust fluctuations around the rational expectations equilibrium. This heterogeneous-agents economy can be approximated by a representative-agent model with constant-gain learning, where the gain parameter is related to the survival rate. JEL Classification: G12, D83, D84assett pricing, bubbles, Heterogeneous Agents, Learning from experience, OLG

    Great Surges of development and alternative forms of globalization

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    The present understanding of globalization is inextricably tied to the free market ideology for both proponents and opponents. This paper will argue that globalization has many potential forms of which the neo-liberal recipe, applied up to now, is only one. Globalization need not be neo-liberal. A pro-development version of globalization has not yet been designed or defended as such. It will be argued that, without it, not only would it be very difficult to relaunch development in the South but also to overcome the present instabilities, imbalances and recessionary trends in the economies of the North.

    When do stock market booms occur? the macroeconomic and policy environments of 20th century booms

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    This paper studies the macroeconomic conditions and policy environments under which stock market booms occurred among ten developed countries during the 20th Century. We find that booms tended to occur during periods of above-average growth of real output, and below-average and falling inflation. We also find that booms often ended within a few months of an increase in inflation and monetary policy tightening. The evidence suggests that booms reflect both real macroeconomic phenomena and monetary policy, as well as the extant regulatory environment.Monetary policy ; Stock exchanges

    Finite-time singularity in the dynamics of the world population, economic and financial indices

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    Contrary to common belief, both the Earth's human population and its economic output have grown faster than exponential, i.e., in a super-Malthusian mode, for most of the known history. These growth rates are compatible with a spontaneous singularity occuring at the same critical time 2052 +- 10 signaling an abrupt transition to a new regime. The degree of abruptness can be infered from the fact that the maximum of the world population growth rate was reached in 1970, i.e., about 80 years before the predicted singular time, corresponding to approximately 4% of the studied time interval over which the acceleration is documented. This rounding-off of the finite-time singularity is probably due to a combination of well-known finite-size effects and friction and suggests that we have already entered the transition region to a new regime. In theoretical support, a multivariate analysis coupling population, capital, R&D and technology shows that a dramatic acceleration in the population during most of the timespan can occur even though the isolated dynamics do not exhibit it. Possible scenarios for the cross-over and the new regime are discussed. Nottale, Chaline and Grou have recently independently applied a log-periodic analysis to the main crises of different civilisations. It is striking that these two independent analyses based on a different data set gives a critical time which is compatible within the error bars.Comment: 29 pages including 37 figures, addition of a Note Added in Proofs connecting with the independent analysis of Nottale, Chaline and Grou of economic crises and of the evolution of different civilisation

    Monetary Policy and Asset Prices: A Look Back at Past U.S. Stock Market Booms

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    This paper examines the economic environments in which past U.S. stock market booms occurred as a first step toward understanding how asset price booms come about and whether monetary policy should be used to defuse booms. We identify several episodes of sustained rapid rise in equity prices in the 19th and 20th Centuries, and then assess the growth of real output, productivity, the price level, money and credit stocks during each episode. Two booms stand out in terms of their length and rate of increase in market prices -- the booms of 1923-29 and 1994-2000. In general, we find that booms occurred in periods of rapid real growth and productivity advance, suggesting that booms are driven at least partly by fundamentals. We find no consistent relationship between inflation and stock market booms, though booms have typically occurred when money and credit growth were above average.

    The Financial Sector and the Future of Capitalism

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    Financial sector innovation and development has been an integral part of the rise of capitalism over the last half millennium. The innovations of the last three decades of the twentieth century were a continuation of the trend; they contributed to an era of global prosperity, but also increased the probability of bank failures as bankers and policymakers inexperienced in the new instruments made mistaken decisions. The likelihood of crises was increased by public policies which increased moral hazard. Governments regulate the financial sector due to asymmetric information between depositors and deposit-taking institutions; restricting entry or the lending activity of financial institutions is inefficient, so the weight is now placed on deposit insurance with moral hazard consequences. The policy challenge is to reduce moral hazard without repressing the financial sector and creating adverse selection in lending practices. Since the mid-1980s cheap money policies have exacerbated moral hazard associated with inadequate financial sector regulation by encouraging highly leveraged investments. The post-2007 financial crisis was one of many crises with idiosyncratic catalysts but with common underlying causes: cheap money available to participants in the integrated but imperfectly regulated global financial market eventually led to loan defaults and bank failures. This is not the end of capitalism, but a reminder of the difficult balancing acts involved in policing the financial sector which is at the heart of capitalist economies.financial development; Moral hazard
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