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Learning and volatility in financial markets: theory, experiments and empirics

Objective

The project aims to study learning and volatility in financial markets. We will develop a theoretical market microstructure model to analyze how informational inefficiencies can arise in financial markets even though traders (who have non speculative reasons to trade) are allowed to buy or sell any quantity of an asset (in a continuous action space). In this theoretical framework, we will also analyze the case in which the asset value can change over time (e.g., because of shocks to the economy). We will study how learning occurs in this economy with changing fundamentals and how learning affects price volatility. This will create a bridge between the theoretical literature on learning and the empirical literature on time varying volatility (e.g., ARCH and GARCH). After developing the theoretical analyses, we will test the predictions in experiments, and proceed to a structural estimation of our models. We will run both field and laboratory experiments. The structural estimation will use transaction data in order to shed light on the process of information aggregation and volatility in different markets (e.g., more or less speculative) and different conditions (tranquil times versus financial crises).

Field of science

  • /social sciences/economics and business/business and management/commerce
  • /humanities/languages and literature/literature - general

Call for proposal

ERC-2007-StG
See other projects for this call

Funding Scheme

ERC-SG - ERC Starting Grant

Host institution

University College London
Address
Gower Street
WC1E 6BT London
United Kingdom
Activity type
Higher or Secondary Education Establishments
EU contribution
€ 765 000
Principal investigator
Antonio Guarino (Dr.)
Administrative Contact
Michael Browne (Mr.)

Beneficiaries (1)

University College London
United Kingdom
EU contribution
€ 765 000
Address
Gower Street
WC1E 6BT London
Activity type
Higher or Secondary Education Establishments
Principal investigator
Antonio Guarino (Dr.)
Administrative Contact
Michael Browne (Mr.)