bulls bears and market sheep abstract a deterministic excess demand model of stock market behavior is presented that generates stochastically fluctuating prices and randomly switching bear and bull markets

market contagion evidence from the panics of 1854 and 1857 to test a model of contagion where individuals hear some bad news and communicate it to their acquaintances who then pass it on leading to a market panic requires a knowledge of the information networks of participants something hitherto unavailable for two panics in the 1850s this paper examines the behavior of irish depositors in a new york bank as recent immigrants their social network was determined largely by their place of origin in ireland and where they lived in new york during both panics this social network turns out to be the prime determinant of behavior

ants rationality and recruitment this paper offers an explanation of behavior that puzzled entomologists and economists ants faced with two identical food sources were observed to concentrate more on one of these but after a period they would turn their attention to the other the same phenomenon has been observed in humans choosing between restaurants after discussing the nature of foraging and recruitment behavior in ants a simple model of stochastic recruitment is suggested this explains the herding and epidemics described in the literature on financial markets as corresponding to the equilibrium distribution of a stochastic process rather than to switching between multiple equilibria

the role of knowledge codification in the emergence of consensus under uncertainty empirical analysis and policy implications the aim of the article is to empirically analyse the main factors which allow the emergence of consensus moreover we raise the question of the nature of the codified process involved which seems to be too reducing to promote knowledge flows within the community and therefore to contribute to learning processes and better choices about the future our analysis relies on a prospective investigation based on a delphi type study carried out by beta in 1994

bubbles and volatility of stock prices effect of mimetic contagion the author discusses the effect of the mimetic contagion on the dynamics of stock prices each investor bids and or asks prices such that adjusts to his present value calculated from his incomplete information set and to the average price of others buyers and sellers mimetic contagion an original stochastic treatment based on the equation of motion of the probability density function is used to calculate the equations of the mean and variance of the market price as soon as the agents are mimetic and or have correlated present values then the moments of the market price are driven away from the fundamental ones copyright 1991 by royal economic society

the wisdom of the minority we consider a simple variant of the canonical model of social learning and show that in many situations it is optimal for an agent to abandon her own information and follow the minority rather than the majority this possibility depends on two economically meaningful requirements agents are differentially informed and observe only the number of agents having chosen each option such as consumers observing only market shares we show that minority wisdom arises when information is sufficiently heterogeneous and the well informed are not overly abundant yet the conditions necessary are not overly restrictive in fact it is possible for the minority to be wise even when the minority consists of a lone dissenter and a majority of citizens are well informed

self reinforcing mechanisms and interactive behaviour we consider the possibility of switching between two options when there are benefits from compatibility and imprecise information about the other agents choices we find that lock in to one of multiple equilibria is just a temporary occurrence the system lingers at prevalence of one option with intermittent transitions to prevalence of the other

is global social welfare increasing a critical level enquiry abstract we assess whether global social welfare has improved in the last decades despite or because of the substantial increase in global population we use for this purpose a relatively unknown but simple and attractive social evaluation approach called critical level generalized utilitarianism clgu clgu posits that social welfare increases with population size if and only if the new lives come with a level of living standards higher than that of a critical level despite its attractiveness clgu poses a number of practical difficulties that may explain why the literature has left it largely unexplored we address these difficulties by developing new procedures for making partial clgu orderings the headline result is that we can robustly conclude that world welfare has increased between 1990 and 2005 if we judge that lives with per capita yearly consumption of more than 1 248 necessarily increase social welfare the same conclusion applies to sub saharan africa if and only if we are willing to make that same judgment for lives with any level of per capita yearly consumption above 147 otherwise some of the admissible clgu functions will judge the last two decades increase in global population size to have lowered global social welfare

alternative models of individual behaviour and implications for environmental policy abstract most insights of environmental economics are in line with the standard neoclassical economic model of rational behaviour formulated in terms of maximization of utility in general or of profits in particular the standard theory of environmental policy is a case in point however the maximization hypothesis and its methodological foundation have been criticized on many grounds related to a lack of either logical or empirical content moreover over the years a great many alternative models of behaviour have been proposed both criticism and alternatives are surveyed here attention is devoted to relevant insights from the philosophy of science the notion of methodological individualism and other criticism the alternative behavioural models include bounded rationality and satisficing lexicographic preferences habitual behaviour incommensurability and multicriteria evaluation and various models of behaviour under uncertainty major implications of the criticism and alternative models of individual behaviour for environmental policy theory are outlined

endogenous population with public goods and malthusian fixed resources efficiency or market failure a theoretical population model is developed which takes into account both the desire of a nation for a large population for political and economic reasons as well as the malthusian pressures that suggest that there is a natural tendency toward overpopulation the model assumes that parents care about both the number and well being of their children the results show that these two possible sources of externality do not lead to market failure nor to unfettered competitive individual decisions concerning childbearing that are detrimental to society annotation

the value of diffusing information abstract how does the speed by which information diffuses affect its value to a stock market investor in a structural model solved in closed form this speed has two opposing effects on the empirically dominant term of the value of information faster diffusing information means quicker and less noisy profits but also increases competing informed trading impounding more information into prices and eroding profits structural empirical analysis of stock market reaction to drug approvals using media coverage as a proxy for the transmission rate of information finds that the value of information is hump shaped in its future transmission rate moreover the estimated amount of noise trading is small

positive feedback trading and diffusion of asset price changes evidence from housing transactions the positive feedback hypothesis states that good news bad news engenders positive negative attitudes that accentuate the impact of the news on asset prices it is a special case of the representativeness heuristic which states that there is a general tendency to overemphasize the most recent evidence this paper tests a form of the positive feedback hypothesis where recent rates of change in asset prices become important information used by decision makers if this is the case housing price changes will tend to diffuse throughout a metropolitan area evidence from hartford connecticut supports this hypothesis and the evidence is inconsistent with alternative explanations

why is equity order flow so persistent abstract order flow in equity markets is remarkably persistent in the sense that order signs to buy or sell are positively autocorrelated out to time lags of tens of thousands of orders corresponding to many days two possible explanations are herding corresponding to positive correlation in the behavior of different investors or order splitting corresponding to positive autocorrelation in the behavior of single investors we investigate this using order flow data from the london stock exchange for which we have membership identifiers by formulating models for herding and order splitting as well as models for brokerage choice we are able to overcome the distortion introduced by brokerage on timescales of less than a few hours the persistence of order flow is overwhelmingly due to splitting rather than herding we also study the properties of brokerage order flow and show that it is remarkably consistent both cross sectionally and longitudinally

libertarian paternalism information production and financial decision making we develop a theoretical model to analyze the effects of libertarian paternalism on information production and financial decision making individuals in our model appreciate the information content of the recommendations made by a social planner this affects their incentive to gather information and in turn the speed at which information spreads across market participants via social learning or formal advice channels we characterize situations in which libertarian paternalism improves welfare and contrast them with scenarios in which this policy is suboptimal because of its negative impact on the production and propagation of information the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

evolution coordination and banking panics abstract i study equilibrium selection by an evolutionary process in an environment with multiple equilibria one of which involves a banking panic the analysis is built on a repeated version of the diamond dybvig 1983 model the optimal equilibrium is uniquely selected if it is also risk dominant when there are multiple banks the probability of observing a panic increases as the size of the banks decreases local interaction generates contagion effects that allow a bank run to spread first among banks in the same geographic location and then throughout the population

rational herding in financial economics abstract this paper briefly describes recent papers on the economics of rational herding in financial markets some models can predict perfect herding in which rational agents all act alike without any countervailing force such herding typically arises either from direct payoff externalities negative externalities in bank runs positive externalities in the generation of trading liquidity or in information acquisition principal agent problems based on managerial desire to protect or signal reputation or informational learning cascades the paper also provides a few pointers to related literature and suggests issues to be addressed in future research

fertility choice land and the malthusian hypothesis in a standard overlapping generations growth model with a fixed amount of land and endogenous fertility the competitive economy converges to a steady state with a zero population growth rate and positive consumption per capita the malthusian hypothesis is interpreted as a positive statement about the relationship between population growth and consumption per capita when production exhibits diminishing returns to labor and there is a fixed amount of land essential for production even when individuals care only about the number of their children and not about their children s welfare the equilibrium is such that they eventually would choose to have only one child for each adult hence if malthus s positive check on population is the result of the response of optimizing agents to competitively determined prices malthus s pessimistic conjecture is not necessarily true even though his other assumptions hold from authors

property rights and efficiency in olg models with endogenous fertility is there an economic rationale for pronatalist policies we propose and analyze a particular market failure that leads to inefficiently low fertility in equilibrium the friction is caused by the lack of ownership of children if parents have no claim on their children s income the private benefit from producing a child can be smaller than the social benefit we analyze an overlapping generations model with fertility choice and parental altruism ownership is modeled as a minimum constraint on transfers from parents to children using the efficiency concepts proposed in golosov jones and tertilt 2007 we find that whenever the transfer floor is binding fertility choices are inefficient second we show that the usual conditions for efficiency are not sufficient in this context third in contrast to settings with exogenous fertility a payg social security system cannot be used to implement efficient allocations to achieve an efficient outcome government transfers need to be tied to fertility choice

earnings news and small traders an intraday analysis abstract this study separates trading volume into buyer and seller initiated activities and examines the directional volume reaction in small and large trades to different types of earnings news good bad news triggers brief but intense buying selling in the large trades however a persistent period of unusually high buying activity is observed in the small trades irrespective of the news this anomalous proclivity of small traders to buy is robust across firm size trading volume and different earnings expectation models several explanations are discussed although the behavior does not seem fully explained by existing theories

looking at the population problem through the prism of heterogeneity welfare and policy analyses upon introducing heterogeneity and dynamics into a model of the demand for children a problem of optimal population is defined and analyzed it is shown that from the perspective of social welfare better educated individuals produce too few children while less educated individuals produce too many children and all individuals invest too little in the education of their children the impact of several policy tools geared at addressing the population problem is investigated in particular how child allowances and other tax subsidy policies can be harnessed to enhance welfare and how and why early childhood education programs can mitigate the population problem

word of mouth communication and social learning this paper studies the way that word of mouth communication aggregates the information of individual agents we find that the structure of the communication process determines whether all agents end up making identical choices with less communication making this conformity more likely despite the players naive decision rules and the stochastic decision environment word of mouth communication may lead all players to adopt the action that is on average superior these socially efficient outcomes tend to occur when each agent samples only a few others i introduction economic agents must often make decisions without knowing the costs and benefits of the possible choices given the frequency with which such situations arise it is understandable that agents often choose not to perform studies or experiments but instead rely on whatever information they have obtained via casual word of mouth communication reliance on this sort of easily obtained information appears to be common in circumstances ranging from consumers choosing restaurants or auto mechanics to business managers evaluating alternative organizational structures this paper studies two related environments in arguing that individuals reliance on word of mouth communication has interesting implications for their aggregate behavior first motivated by the diffusion of new technologies we consider a choice between two competing products with unequal qualities or payoffs and show that the structure of communication is important in determining whether the population as a whole is likely to learn to use the superior product second we consider a choice between two products or practices that are equally good and ask whether consumers are likely to herd onto a single choice or whether diversity will obtain even in the long run we explore the implications of word of mouth communication in a simple nonstrategic environment there is a large population of identical players each of whom repeatedly chooses between two possible actions each player s payoff is determined by his own

public control of rational and unpredictable epidemics abstract efforts to improve disease forecasting are often justified on the grounds that accurate and reliable forecasts offer opportunities to improve response to epidemics yet little is known about how disease forecasts influence the responsiveness to public health interventions this paper couples an optimal stopping model and rational disease prevention with a stochastic compartmental epidemiological model of disease spread to develop a framework for evaluating the timing of public health interventions in response to rational but unpredictable epidemics optimal behavior by a public health agency is characterized by a pair of critical prevalence thresholds that trigger implementation and suspension of a public prevention program unlike existing economic thresholds for disease prevention our decision thresholds account for time varying probabilities of different levels of infection prevention by private individuals and the likelihood of crossing epidemiological thresholds that determine disease persistence

the empirical evidence for citizen information and a local market for public goods in their 1993 article in this review paul teske mark schneider michael mintrom and samuel best sought to establish the microfoundations for a model of a competitive market for public 5 services between local governments in polycentric regions an important part of their model focused on subgroups of informed citizens especially recent movers theoretical analysis was supplemented by an empirical study of the factors shaping accuracy of long island homeowners information about relative expenditures and tax rates of their school districts david lowery w e lyons and ruth hoogland dehoog criticize the relevance of this empirical evidence suggesting the atypical nature of education as a service especially in this site and challenging the sufficiency of the demonstrated levels of information for generating a competitive market teske and his colleagues reply by pointing out the general importance of education throughout american local policymaking and by defending the relevance of their measures and conclusions for their market model

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

social interaction and stock market participation we propose that stock market participation is influenced by social interaction in our model any given social investor finds the market more attractive when more of his peers participate we test this theory using data from the health and retirement study and find that social households those who interact with their neighbors or attend church are substantially more likely to invest in the market than non social households controlling for wealth race education and risk tolerance moreover consistent with a peer effects story the impact of sociability is stronger in states where stock market participation rates are higher

energy price shocks household location patterns and housing crises theory and implications abstract the u s housing collapse in 2007 is widely blamed for inducing a financial crisis that spread to the real economy and caused a severe and prolonged downturn this paper develops a model to investigate the role of gasoline price shocks in triggering the housing market collapse and identifies a new channel through which energy price shocks affect the financial market and the macro economy results suggest that unanticipated gasoline price shocks increase the cost of work commutes lower the value of homes away from the city center and increase foreclosure rates as homeowners either cannot afford mortgage payments amid elevated gas expenditures or seek to abandon underwater homes the model predicts that gasoline price shocks disproportionately affect suburban households that face greater exposure due to longer commutes and lower incomes empirical evidence from the 2007 08 housing collapse is presented to corroborate this theory

social learning and dynamic pricing of durable goods we analyze the impacts of social learning sl on the dynamic pricing and consumer adoption of durable goods in a two period monopoly consumers can make either early uninformed purchases or late but potentially informed purchases as a result of social learning several results are derived first we identify the market conditions under which ex ante homogeneous consumers may choose to purchase at different times second equilibrium adoption may demonstrate inertia where all adopt late or frenzy where all adopt early in particular adoption inertia appears when sl intensity is reasonably high but may vanish when sl intensity exceeds a certain threshold third firm profits and social welfare first weakly decrease in sl intensity and may then jump up by a lump sum amount at the threshold sl intensity level mentioned above last we show that the firm potentially benefits from informative advertising or investing to cultivate more social learning

does twitter chatter matter online reviews and box office revenues with a rapid rise of text based social media and online word of mouth wom activity millions of people express their thoughts and opinions on a variety of topics considering that nowadays wom is

does culture influence asset managers views and behavior abstract this research enters new ground by presenting comparative survey evidence on asset managers views and behavior in the united states germany japan and thailand relying on hofstede s four cultural dimensions we find that cultural differences are most helpful in understanding country differences which cannot be explained by pure economic reasoning in short controlling for various determinants the dimension of more individualism predicts less herding behavior more power distance leads to older and comparatively less experienced managers in the upper hierarchy masculinity brings men into top positions and to higher volumes of assets under personal responsibility and uncertainty avoidance is related to higher safety margins against the tracking error allowed and relatively more research effort these consequences i e the culturally different importance of herding age experience gender tracking error and research effort clearly affect investment behavior although in a complex way

culture and r2 abstract consistent with predictions from the psychology literature we find that stock prices co move more less in culturally tight loose and collectivistic individualistic countries culture influences stock price synchronicity by affecting correlations in investors trading activities and a country s information environment both market wide and firm specific variations are lower in tighter cultures individualism is mostly associated with higher firm specific variations trade and financial openness weakens the effect of domestic culture on stock price comovements these results hold for various robustness checks our study suggests that culture is an important omitted variable in the literature that investigates cross country differences in stock price comovements

filtered social learning knowledge sharing is economically important but also typically incomplete we filter our communication this paper analyzes the consequences of filtering in the model homogeneous agents share knowledge with their peers whenever the private benefits exceed communication costs the welfare implications of this transmission mechanism hinge on whether units of knowledge complement substitute for or are independent of each other both substitutability and complementarity generate externalities cheaper communication eliminates externalities in the former case but not necessarily in the latter complementary basic skills such as numeracy catalyze technology adoption and adoption may be path dependent even when payoffs are certain and independent across agents

eu participation and the external trade of greece an appraisal of the evidence this paper investigates the trade effects caused by the accession of greece to the eu a large part of the analysis is in terms of trade flows disaggregated by the 21 categories of the greek tariff schedule these series are original data sets which have been constructed by the author to be used here for the first time the main message is that after 1981 events took a turn closer to the pessimistic pre accession predictions our findings indicate that during the post integration period the external trade of greece has been reoriented towards the eu countries and greece lost part of its comparative advantage in those sectors in which such an advantage exists we also suggest that as far as imports are concerned eu participation has caused gross trade creation for imports from the eu countries and gross trade diversion for imports from the rest of the world as far as exports are concerned the results indicate that eu participation has caused only a modest increase in greek exports to the eu market

some welfare theoretic implications of endogenous fertility this paper explores the implications of endogenous fertility for inter and intragenerational equity and for intergenerational efficiency considering equity requires social welfare criteria with respect to the issue of intragenerational equity 2 possible criteria in relation to the laissez faire solution are 1 total utility across generations and 2 average or per capita utility when population size is not fixed the 2 are not the same when fertility is not endogenous it is possible to consider noncoercive policies for achieving socially optimal population size or rate growth in general child allowances or taxes and subsidies to future consumption are sufficient to achieve the desired outcome with respect to within generation income distribution a system of child allowances and tax exemptions designed to alleviate poverty and reduce inequality may actually worsen the situation when both fertility and labor supply are endogenous discussing the issue of efficiency for members of the current generation does not require a social welfare function neither diminishing returns nor the existence of public goods unless financed by distortionary taxes leads to market failure from this point of view but the inability of parents to enforce transfers among their offspring or to bargain with the families of the potential spouses of their children may indeed lead to market failure finally the paper examines the implications for fertility of the inefficiency in an economy resulting from the absence of a capital market for transferring from present to future consumption in this case the welfare improving introduction of a capital market may increase the rate of growth of population when parents value children for themselves as well as a means of providing sustenance in old age

second order beliefs and the individual investor in a panel survey of individual investors we show that investors second order beliefs their beliefs about the return expectations of other investors influence investment decisions investors who believe others hold more optimistic stock market expectations allocate more of their own portfolio to stocks even after controlling for their own risk and return expectations however second order beliefs are inaccurate and exhibit several well known psychological biases we observe both the tendency of investors to believe that their own opinion is relatively more common among the population false consensus and that others who hold divergent beliefs are considered to be biased bias blind spot

room to move international financial markets and national welfare states a central research question in international political economy concerns the influence of financial markets on government policy outcomes to what extent does international capital mobility limit government policy choices i evaluate the relationship between international financial markets and government policy outcomes with a focus on the government bond market in developed democracies evidence includes interviews with financial market participants and a cross sectional time series analysis of the determinants of interest rates this evaluation suggests that governments of developed democracies face strong but narrowly defined financial market pressures financial market participants are concerned with a few macroeconomic policy indicators including inflation rates and government deficit gdp ratios but not with micropolicy indicators such as the distribution of government spending across functional categories in these areas governments retain policymaking autonomy i conclude by exploring the role of financial market influences within domestic politics and offering suggestions for further research

taking the road less traveled by does conversation eradicate pernicious cascades abstract we offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads despite communication of the payoff outcomes from past choices this reflects both direct and indirect action based information externalities in contrast with previous cascades literature cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever furthermore the ability of individuals to communicate can reduce average decision accuracy and welfare

sustainable development and girardian economics what is sustainable development why is it an issue ideally what needs to be done and practically what can be done are answered in this chapter by relying on the framework of girardian economics developed by french economist andre orlean and based on rene girard s model of mimetic rivalry under conditions of high uncertainty

the market for evaluations recent developments in computer networks have driven the cost of distributing information virtually to zero creating extraordinary opportunities for sharing product evaluations the authors present pricing and subsidy mechanisms that operate through a computerized market and induce the efficient provision of evaluations the mechanisms overcome three major challenges first evaluations which are public goods are likely to be underprovided second an inefficient ordering of evaluators may arise and third the optimal quantity of evaluations depends on what is learned from the initial evaluations

nature or nurture what determines investor behavior abstract using data on identical and fraternal twins complete financial portfolios we decompose the cross sectional variation in investor behavior we find that a genetic factor explains about one third of the variance in stock market participation and asset allocation family environment has an effect on the behavior of young individuals but this effect is not long lasting and disappears as an individual gains experience frequent contact among twins results in similar investment behavior beyond a genetic factor twins who grew up in different environments still display similar investment behavior our interpretation of a genetic component of the decision to invest in the stock market is that there are innate differences in factors affecting effective stock market participation costs we attribute the genetic component of asset allocation the relative amount invested in equities and the portfolio volatility to genetic variation in risk preferences

the economics of rumours this paper studies a class of information transmission processes which we call rumours the distinctive features of these processes are that the information transmission takes place in such a way that the recipient does not quite know whether or not to believe the information and that the probability that someone receives the information depends on how many people already have it specifically we study an example in which there is an investment project with returns only known to a few people these people have a cost of undertaking the project and this cost is private information the only information the other agents receive is that someone else has invested they are not told whether that person actually knew the returns or whether he too was just acting on the basis of his observation of others they use their optimal bayesian decision rule to decide whether to invest we show that for a wide class of alternative specifications this decision rule has the property that a positive fraction of those who observe the rumour will not invest in this sense a rumour cannot mislead everybody counter intuitive comparative statics results are obtained for example more information and higher productivity may reduce welfare while changing the speed with which the rumour spreads has no welfare effect

sell probabilistic goods a behavioral explanation for opaque selling probabilistic or opaque selling whereby a seller hides the exact identity of a product until after the buyer makes a payment has been used in practice and received considerable attention in the literature under what conditions and why is probabilistic selling attractive to firms the extant literature has offered the following explanations to price discriminate heterogeneous consumers to reduce supply demand mismatches and to soften price competition in this paper we provide a new explanation to exploit consumer bounded rationality in the sense of anecdotal reasoning we build a simple model where the firm is a monopoly consumers are homogeneous and there is no demand uncertainty or capacity constraint this model allows us to isolate the impact of consumer bounded rationality on the adoption of opaque selling we find that although it is never optimal to use opaque selling when consumers have rational expectations it can be optimal when consumers are boundedly rational we show that opaque selling may soften price competition and increase the industry profits as a result of consumer bounded rationality our findings underscore the importance of consumer bounded rationality and show that opaque selling might be even more attractive than previously thought

enhanced debt management solving the eurozone crisis by linking debt management with fiscal and monetary policy abstract unconventional approaches to suit unusual circumstances have become acceptable in monetary policy a formerly highly conservative discipline in this paper it is argued that unconventional approaches should also be considered in sovereign debt management in order to contribute to resolving the eurozone sovereign debt crisis first the troika crisis lending to indebted sovereign borrowers in the eurozone is reviewed and compared with standard imf post crisis lending the main difference and shortcoming is the unsustainable character of the eurozone approach due to the omission of demand stimulation components to address this and other shortcomings the features of an ideal alternative funding tool are identified it would solve the funding problems of affected sovereigns help stabilise the banking system but most of all stimulate domestic demand and hence end the vicious downward spiral it is found that this funding method can be implemented as part of enhanced public debt management by each nation s debt management office

business as usual market crashes and wisdom after the fact the authors present a three stage model of market dynamics in the first stage routine behavior tends to keep information of common interest trapped in private hands in the second stage private information reaches a threshold that triggers some agents to alter their behavior these actions release information to the market the final stage involves the market s response to this news as other participants react to the initial departure from routine behavior the authors present an application to industry investment they also outline applications to the international debt crisis to bank runs and to political upheavals copyright 1994 by american economic association

survey evidence on diffusion of interest and information among investors abstract questionnaire surveys of institutional and individual investors were undertaken to learn about patterns of communications it was found that direct interpersonal communications are very important in investor decisions questions elicited what fraction of investors were unsystematic and allowed themselves to be influenced by word of mouth communications or other salient stimuli randomly sampled investors were studied as well as investors in stocks whose price had recently increased dramatically contagion or epidemic models of financial markets are proposed in which interest in individual stocks is spread by word of mouth the survey evidence is interpreted as supporting such models

information percolation momentum and reversal abstract we propose a joint theory of time series momentum and reversal based on a rational expectations model we show that a necessary condition for momentum to arise in this framework is that information flows at an increasing rate we focus on word of mouth communication as a mechanism that enforces this condition and generates short term momentum and long term reversal investors with heterogeneous trading strategies contrarian and momentum traders coexist in the marketplace although a significant proportion of investors are momentum traders momentum is not completely eliminated word of mouth communication spreads rumors and generates price run ups and reversals our theoretical predictions are in line with empirical findings

sequential sales learning and cascades when ipo shares are sold sequentially later potential investors can learn from the purchasing decisions of earlier investors this can lead rapidly to cascades in which subsequent investors optimally ignore their private information and imitate earlier investors although rationing in this situation gives rise to a winner s curse it is irrelevant the model predicts that 1 offerings succeed or fail rapidly 2 demand can be so elastic that even risk neutral issuers underprice to completely avoid failure 3 issuers with good inside information can price their shares so high that they sometimes fail 4 an underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market consider a scenario in which an issuer is selling a new security of uncertain value for example an ipo initial public offering of stock or high yield debt through an underwriter the s e c has banned variable price sales while the value of this new security is highly uncertain to individual market participants investors hold perfectly accurate information when aggregated moreover there are many potential investors and a small number of these investors can jointly determine the value of the firm or its project with high precision it would seem that in this scenario underpriced offerings would succeed and overpriced offerings would fail nevertheless this paper shows that if the distribution channels of invest ment banks are limited underpriced offerings can fail and overpriced offer ings can succeed with limited distribution channels it takes the under writer time to approach interested investors therefore later investors can observe how well an offering has sold to date or at least how successful it has sold relative to offerings previously undertaken by this underwriter

the consumption tax in the presence of altruistic cash and human capital bequests with endogenous fertility decisions abstract we provide an analysis of the consumption tax policy in the presence of cash bequests human capital investments in children and endogenous fertility decisions it is shown that the consumption tax is no longer neutral if the tax rate is constant over the taxpayer s life cycle labor supply is exogenous and the parent expects the offspring to pay the same tax rate if the number of children is chosen optimally by the parent neutrality breaks down because the shadow prices of both bequests and fertility are interlinked it is more expensive to produce a child the larger either bequest is and it is more expensive to make a bequest of either type to each child the larger the number of children produced several examples are provided where imposing the consumption tax induces an increase in the number of children produced and a decrease in net capital formation

the determinants of intra european trade in manufactured goods abstract the determinants of intra european trade in manufactured goods are examined using three models the first model tests whether inter industry specialization between pairs of countries can be explained in terms of inter industry differences in factor intensities and inter country differences in factor endowments the second model tests the effects of country and industry characteristics in the extent of intra industry specialization the third model combines the first two to analyse the determinants of bilateral gross trade in individual industries the empirical results support the specific hypotheses put forward to specify the models

eec integration towards 1992 some distributional aspects gains and losses from 1992 damien j neven this paper examines how the benefits and costs of the internal market programme will be shared across member states the main conclusion is that the northern european countries stand to gain little from 1992 the only exception is the uk which will benefit from integration because initially it is less integrated than its northern neighbours the main beneficiaries will be the southern european countries they will benefit both from a better exploitation of their comparative advantage in labour intensive commodities and from the gains from unexploited scale economies which have already been substantially exploited in northern europe although northern countries have a comparative advantage in goods which are intensive in human capital southern markets for these goods are relatively small that is why it is the southern countries which stand to gain most even if in addition ec trade with the rest of the world is liberalized at the same pace as within the ec labour intensive production especially clothing and footwear in the south could increase by as much as 14 after 1992 areas in the north where such industries are concentrated may be the largest losers from 1992

a microsimulation of traders activity in the stock market the role of heterogeneity agents interactions and trade frictions we propose a model with heterogeneous interacting traders which can explain some of the stylized facts of stock market returns in the model synchronization effects which generate large fluctuations in returns can arise purely from communication and imitation among traders the key element in the model is the introduction of a trade friction which by responding to price movements creates a feedback mechanism on future trading and generates volatility clustering the model also reproduces the empirically observed positive cross correlation between volatility and trading volume

the self perpetuation of biased beliefs to overcome strong prior beliefs strong evidence to the contrary is needed if a person is predisposed to choosing a certain action the advice from an advisor who sets a low threshold for recommending the alternative action is not of much use the preference for like minded advisors who supply coarse information implies that the advice a person receives is likely to reinforce his existing priors this effect can lead to polarisation of opinion and the emergence of self serving beliefs the learning process is prolonged and the induced short run bias can become perpetual if information is costly