In addition to their direct effects, episodes of financial instability may decrease investor confidence. Measuring the impact of a crisis on investor confidence is complicated by the fact that it is difficult to disentangle the effect of investor confidence from coincident direct effects of the...

We study portfolio choice when labor income and dividends are cointegrated. Economically plausible calibrations suggest young investors should take substantial short positions in the stock market. Because of cointegration the young agent's human capital effectively becomes stock-like. However,...

This paper focuses on the issue of limited financial market participation and determines a lower bound on the level of fixed transaction costs that are required to reconcile observed portfolio choices with asset returns within an isoelastic utility framework. The bound is determined from the set...

Several explanations for the observed limited stock market participation have been offered in the literature. One of the most promising one is the presence of market frictions mostly in the form of fixed entry and/or transaction costs. Empirical studies strongly point to a significant structural...

We examine in an experiment the causes, consequences and possible cures of myopic loss aversion (MLA) for investment behaviour under risk. We find that both, investment horizons and feedback frequency contribute almost equally to the effects of MLA. Longer investment horizons and less frequent...

How do differences in the creit channel affect investment behavior in the U.S. and the Euro area? To analyze this question, we calibrate an agency cost model of business cycles. We focus on two key components of the lending channel, the default premium associated with bank loans and bankruptcy...

This paper examines how time to build alters strategic investment behaviour under oligopoly. Facing demand uncertainty, firms decide whether to invest early or wait until uncertainty has been resolved. A game that captures time-to-build investment is contrasted with another one in which...

There are two stylised facts, namely weak demand for life-annuities and flat age-wealth profile that contradict the life-cycle hypothesis. In this paper we design a theoretical framework, which combines plausible arguments, which have been put forward in the literature to reconcile theory with...

To explore why bubbles frequently emerge in the experimental asset market model of Smith, Suchanek and Williams (1988), we vary the fundamental value process (constant or declining) and the cash-to-asset value-ratio (constant or increasing). We observe high mispricing in treatments with a...

Simulations of agent-based models have shown that the stylized facts (unit-root, fat tails and volatility clustering) of financial markets have a possible explanation in the interactions among agents. However, the complexity, originating from the presence of non-linearity and interactions, often...