BLOG

Double overreaction in beauty contests with information acquisition: theory and experiment

7/27/2020

Here.

The experiment highlights the role of information acquisition in the reaction of participants to public disclosures. This finding provides some insight into the so-called forward guidance puzzle documented by Del Negro et al. (2015), which refers to the surprisingly weak reaction of market participants to central banks’ disclosures about the banks’ intended future policy compared to the reactions predicted theoretically in standard new Keynesian models. Shaping market expectations seems more challenging in practice than in theory. Angeletos and Lian (2018) propose the lack of common knowledge and Garcia Schmidt and Woodford (2018) the limited level of reasoning as possible causes of this puzzle. Both hypotheses are supported by our experiment: a limited level of reasoning explains weak attention to the most common and least private signal; this weak attention then prevents the emergence of common knowledge among participants. Moreover, given their information, participants typically deploy a limited level of reasoning in choosing their action.

From:

Romain Baeriswyl
Kene Boun My
Camille Cornand

Forecasting Skills in Experimental Markets: Illusion or Reality?

7/27/2020

Here.

Using experimental asset markets, we study the situation of a financial analyst who is trying to infer the fundamental value of an asset by observing the market’s history. We find that such capacity requires both standard cognitive skills (IQ) as well as social and emotional skills. However, forecasters with high emotional skills tend to perform worse when market mispricing is high as they tend to give too much emphasis to the noisy signals from market data. By contrast, forecasters with high social skills perform especially well in markets with high levels of mispricing in which their skills could help them detect possible manipulation attempts. Finally, males outperform females in the forecasting task after controlling for a large number of relevant individual characteristics such as risk attitudes, cognitive skills, emotional intelligence, and personality traits.

From:

Brice Corgnet
Cary Deck
Mark DeSantis
David Porter

Randomized Double Auctions Gains from Trade, Trader Roles, and Price Discovery

7/27/2020

Here.

Experimental double-auction commodity markets are known to exhibit robust convergence to competitive equilibria under stable or cyclical supply and demand conditions, but little is known about their performance in truly random environments. We provide a comprehensive study of double auctions in a stochastic setting where the equilibrium prices, trading volumes and gains from trade are highly variable across periods, and with commodity traders who may buy or sell their goods depending on market conditions and their individual outcomes. We find that performance in this stochastic environment is sensitive to underlying market conditions. Efficiency is higher and convergence to the competitive equilibrium stronger when the potential gains from trade are high and when the equilibrium spans a wide range of quantities, implying a large number of marginal trades. Speculative re-trading is prevalent, especially for individual traders who have little to gain under equilibrium pricing, leading to some redistribution of gains from high to low expected earners. Those with the largest expected gains typically earn far less than predicted, while those with little or no predicted earnings gain modestly from speculation. Excessive trading volumes are associated with negative efficiencies in markets with low gains from trade, but not in the high-gains markets, where zero-sum trading and re-trading appear not to obstruct and possibly enforce efficiency and near-equilibrium pricing. Buyers earn more relative to their competitive equilibrium benchmark than sellers do. Introducing trader specialization leads to fewer trading errors and higher market efficiency, but it does not eliminate zero-sum trading and re-trading.

From:

Katerina Sherstyuk
Krit Phankitnirundorn
Michael J. Roberts

Monetary Policy and Asset Price Bubbles: A Laboratory Experiment

7/24/2020

Here.

Advocates of a Leaning-Against-the-Wind monetary policy have claimed that such a policy can moderate asset price bubbles. On the other hand, there are compelling theoretical arguments that the policy would have the opposite effect. We study the effect of monetary policy on asset prices in a laboratory experiment with an overlapping generations structure. Participants in the role of the young generation allocate their endowment between two investments: a risky asset and a one-period riskless bond. The risky asset pays no dividend and thus capital gains are its only source of value. Consequently, its price is a pure bubble. We study how variations in the interest rate a§ect the evolution of the bubble in an experiment with three treatments. One treatment has a Öxed low interest rate, another a Öxed high interest rate, and the third has a Leaning-Againstthe-Wind interest rate policy in e§ect. We observe that the bubble increases (decreases) when interest rates are lower (higher) in the period of a policy change. However, the opposite e§ect is observed in the following period, when higher (lower) interest rates are associated with greater (smaller) bubble growth. Direct measurement of expectations reveals a Trend-Following component.

Jordi Galí
Giovanni Giusti
Charles N. Noussair

Systemic Banking Crises Database: A Timely Update in COVID-19 Times

7/24/2020

Here.

This paper updates the database on systemic banking crises presented in Laeven and Valencia (2013a). Drawing on 151 systemic banking crises episodes around the globe during 1970-2017, the database includes information on crisis dates, policy responses to resolve banking crises, and the fiscal and output costs of crises. We provide new evidence that crises in high-income countries tend to last longer and be associated with higher output losses, lower fiscal costs, and more extensive use of bank guarantees and expansionary macro policies than crises in low- and middle-income countries. We complement the banking crises dates with sovereign debt and currency crises dates to find that sovereign debt and currency crises tend to coincide with or follow banking crises.

Luc Laeven
Fabian Valencia

Engaging Students Through Experiments Online and in the Classroom(Wednesday 15th July, 2020; 3pm-4pm BST)

7/8/2020

Here.

EconTEAching Session 6: Engaging Students Through Experiments Online and in the Classroom

Centre for Teaching and Learning Economics
LSEat University College London

Featuring:
Prof. Robert Gazzale
(University of Toronto)

Featuring:
Prof. Humberto Llavador
(Universitat Pompeu Fabra and Barcelona GSE)

Chaired by:

Dr. Cloda Jenkins
(UCL)

THE MONETARY MYSTERY OF THE LAST DECADE

7/8/2020

Here.

There is a feeling that the wisdom of monetarism has vanished during the last decade. Exceptional interventions of the Federal Reserve (FED) and the European Central Bank (ECB) have barely avoided deflation and have achieved delayed and modest growth. The absence of a solid monetarist explanation has been notorious. Moreover, after the formidable impact of lockdowns, many economists are now predicting a prolonged recession followed by a protracted deflation Japanese style, even when a much larger FED intervention is underway. Where is monetary policy headed to? What is ahead, inflation or deflation? Are we simply witnessing the final demise of monetarism? Or something else is at stake?

From:
Mario Teijeiro

Rejecting Rejections — Seeking Acceptance of Experimental Economics in Economics Journals

7/1/2020

Here.

This paper addresses a central question of the experimental turn in economics: how a relatively small group of experimental economists in the 1970s and 1980s managed to convince editors and referees of leading economics journals of the merits of the experimental method. The consequence of this was that, by the early 1990s, experimental economics research became a standard feature of economics journals and of the economics mainstream. I draw on a unique—and, to this date, never utilized— corpus of referee reports (and related correspondence) by Charles Plott, one of the leading pioneers of experimental economics. His publication corpus is used as a case study of how experimental economists sought acceptance in economics journals. I describe a set of nine strategies that he and other early experimental economists used to convince journal editors and referees who had no direct experience with conducting economic experiments of the merits of the experimental method.

From:

Andrej Svorenčíka

Speculation and Bubbles in an Asset Market

6/29/2020

Here.

A classroom game.

From:

Sheryl B. Ball
Charles A. Holt

Bubbles in Experimental Asset Markets

6/29/2020

Here.

A review of research.

Various factors and their effects on bubbles and crashes

From:

Praveen Kujal

Information Aggregation and the Cognitive Make-up of Traders

6/29/2020

Here.

We assess the effect of the cognitive make-up of traders on the informational efficiency of markets. We put forth that cognitive skills, such as cognitive reflection, are crucial for ensuring the informational efficiency of markets because they endow traders with the ability to infer others’ information from prices. Using laboratory experiments, we show that information aggregation is significantly enhanced when (i) all traders possess high levels of cognitive sophistication and (ii) this high level of cognitive sophistication is common information for all traders. Our findings shed light on the cognitive and informational constraints underlying the efficient market hypothesis. Keywords: Information aggregation, market efficiency, cognitive skills, cognitive

From:

Brice Corgnet
Mark DeSantis
David Porter

Systemic Credit Freezes in Financial Lending Networks

6/22/2020

Here.

Powerpoint version of a paper.

This paper develops a network model of interbank lending, in which banks decide to extend credit to their potential borrowers. Borrowers are subject to shocks that may force them to default on their loans. In contrast to much of the previous literature on financial networks, we focus on how anticipation of future defaults may result in ex ante “credit freezes,” whereby banks refuse to extend credit to one another. We first characterize the terms of the interbank contracts and the patterns of interbank lending that emerge in equilibrium. We then study how shifts in the distribution of shocks can result in complex credit freezes that travel throughout the network. We use this framework to analyze the effects of various policy interventions on systemic credit freezes.

From:

James Siderius
Daron Acemoglu
Asu Ozdaglar
Alireza Tahbaz-Salehi

Central Bank Communication that Works: Lessons from Lab Experiments

6/15/2020

Here.

The causal effects of central bank communication on economic expectations and their underlying mechanisms are tested in controlled laboratory experiments. We find that central bank communication has a stabilizing effect on individual and aggregate outcomes, and the size of the effect varies with the type of communication. Announcing past interest rate changes has the largest effect, reducing volatility of individual price and expenditure forecasts by one-quarter and four-fifths, respectively, and cutting a quarter of macroeconomic volatility. Forward-looking announcements have less effect on individual forecasts, especially if they do not clarify the timing of future policy changes. There is little evidence that central bank communication transmits via its influence on forecasters’ ability to predict future nominal interest rates. Rather, communication is effective via simple and relatable backward-looking announcements that exert strong influence on less-accurate forecasters.

From:

Oleksiy Kryvtsova
Luba Petersen

Greg Mankiw reflections of a textbook author

6/14/2020

Here.

Journal of Economic Literature 2020

In this essay, I reflect on textbook writing after three decades of participating in the activity. I address the following questions: What perspective should textbooks take? What is the best approach to teaching microeconomics? What is the best approach to teaching macroeconomics? How does the content of the introductory course evolve? How much material should textbooks include? Are textbooks too expensive? How is digital technology changing the market for textbooks? Who should become a textbook author?

From:
Greg Mankiw

Understanding Credit Risk: A Classroom Experiment

6/14/2020

Here.

This classroom experiment introduces students to the notion of credit risk and expected return, by allowing them to trade on comparable corporate bond issues from two types of markets: investmentgrade and high-yield markets. Investment-grade issues have a lower probability of default than high-yield issues and thus provide a lower yield. Participants can earn money in three ways: from coupon payments, from the face value of the bond, and by capital gains. While participating in an experiment, students learn about the notion of risk and return, how credit risk affects bond prices, the movement of bond prices through time, and other general characteristics of the bond markets.

From:

Maros Servatka
George Theocharides

<<Previous

Only Paul Could Go To Changchun