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Dynamics of Asset Prices Based on Time-varying Risk Aversion and Adaptive Beliefs System (in Korean)

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  • Beum-Jo Park

    (Department of Economics, Dankook University)

Abstract

This paper, unlike previous studies on price behavior in asset markets, suggests an adaptive beliefs system which is a heterogeneous agent model with time-varying risk aversion tendency. The dynamic herding of chartists and the time-varying risk aversion in the short term cause sharp changes in returns and persistence of volatility. This paper also extends adaptive beliefs system with the assumptions of bounded rationality and heterogeneous agents, and theoretically prove the existence of steady state of in the deterministic model and their stability. The empirical analysis using daily data of KOSPI and simulated time series data also provides a valuable evidence that the time-varying difference between levels of risk aversion for agent groups plays an important role in the dynamics of asset prices.

Suggested Citation

  • Beum-Jo Park, 2012. "Dynamics of Asset Prices Based on Time-varying Risk Aversion and Adaptive Beliefs System (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 18(3), pages 157-187, September.
    • Handle: RePEc:bok:journl:v:18:y:2012:i:3:p:157-187
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    More about this item

    Keywords

    Time-varying risk aversion; Bounded rationality; Heterogeneous agent; Adaptive beliefs system; Asset price dynamics;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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