Rasmus Pank Roulund

We examine the social desirability of macroprudential measures, particularly those aimed at riskier home buyers. We examine the effectiveness of these measures against social costs, such as reduced access to the housing ladder for poorer households. Our analysis shows that the measures implemented so far have not limited access to credit or the housing markets. They have been effective in limiting the riskiest loans, minimizing negative equity episodes, reducing systemic risks by debilitating the house price-leverage spiral, and limiting the depths of contractions of a range of macro-financial variables. The welfare of households has also improved. Costs from these measures have been limited and have materialized through a rise in the age-income profile of first-time buyers, and somewhat more attenuated booms. Our results point to the conclusion that macroprudence is desirable when insulated from short-term interference and quick gains. The economy becomes more robust and even households in the lowest decile of the wealth distribution benefit from the general equilibrium effects of more stable financial provision.

Using a new experimental design, we show how asset prices and the overconfidence of traders co-move; when asset prices go up, overconfidence rises, and when asset prices go down, overconfidence falls. Consistent with models of endogenous overconfidence (Daniel et al., 1998; Gervais and Odean, 2001), we observe that becoming successful makes traders overconfident, yet becoming overconfident does not necessarily make traders successful. Finally, we confirm existing experimental evidence that high cognitive ability results in better market performance.

This paper examines how traders’ confidence and market confidence affect outcomes in an experimental asset market with known fundamental values. In this type of market, prices usually present large deviations from the fundamental value; in other words, bubbles are known to occur. We measure beliefs by asking participants to forecast the one-period-ahead price as a discrete probability mass distribution. We define confidence as the inverse of the dispersion of beliefs for each trader, and also create a market-wide measure of this to measure agreement across traders. We find that confidence affects price-formation and is also important in explaining the dynamics and size of the bubble. Moreover, as traders are successful they become increasingly certain of their beliefs, even if these beliefs are on non-fundamental values, thus increasing the likelihood of price bubbles.