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Title: Simulation analysis of learning and expectations in the stock exchange: A case study with the Warsaw Stock Exchange (WSE).
Authors: Yau, Louis.
Award date: 1996
Presented at: University of Leicester
Abstract: Increasingly, it has become difficult to explain economic phenomena within the neo-classical framework in a period of changes when learning about the changes precedes any costly adaptation. The process of learning has been argued to be a missing element. It is defined as the continuous inference from observable data the unobservable state and structure of the market that are typically unknown. Learning is more detectable during rapid economic changes and when the gain- loss differential is critically enormous, like in the financial markets. Hence, an interactive learning model is formulated to study how learning and the interaction between market and traders can affect price. In particular, the noise trader approach which accounts for the excess volatility and the mean reversion phenomena in share prices, is used as a theoretical framework that allows learning to happen. A case study is done to four chosen shares in the Warsaw Stock Exchange (WSE), a newly-emerged market in a transitory economy. Analysis is done by means of simulation and detailed comparison between empirical and simulated data. The objectives are: (i) to understand the effect of learning and the interaction between market and agents and (ii) to search for the underlying conditions in the chosen markets so as to have a better understanding of them. The results suggest that the four chosen markets in WSE are not efficient. Self-fulfilling inefficient market beliefs of agents who are learning the state of the market with dynamically misspecified models may be a cause. Learning also leads to excess volatility and mean reversion in share prices. Moreover, free participation in the market can produce seemingly deceptive regression results against the objective process if agents are capable of influencing market realisation. This is best reflected in one of our controlled extreme cases with no learning in the market.
Level: Doctoral
Qualification: Ph.D.
Rights: Copyright © the author. All rights reserved.
Appears in Collections:Theses, Dept. of Economics
Leicester Theses

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