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Heterogeneous Beliefs, Risk, And Learning In A Simple Asset-Pricing Model With A Market Maker

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Author Info
CHIARELLA, CARL
HE, XUE-ZHONG

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Abstract

The authors are indebted to the anonymous referee for a very detailed and insightful report on an earlier version of this paper that has led to many improvements in the current version. Address correspondence to: Tony He, School of Finance and Economics, University of Technology, Sydney, P.O. Box 123 Broadway, NSW 2007, Australia; e-mail: tony.he1@uts.edu.au.This paper studies the dynamics of a simple discounted present-value asset-pricing model where agents have different risk attitudes and follow different expectation formation schemes for the price distribution. A market-maker scenario is used as the market-clearing mechanism, in contrast to the more usual Walrasian scenario. In particular, the paper concentrates on models of fundamentalists and trend followers who follow recursive geometric-decay (learning) processes (GDP) with both finite and infinite memory. The analysis depicts how the dynamics are affected by various key elements (or parameters) of the model, such as the adjustment speed of the market maker, the extrapolation rate of the trend followers, the decay rate of the GDP, the lag length used in the learning GDP, and external random factors.

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Publisher Info
Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 7 (2003)
Issue (Month): 04 (September)
Pages: 503-536
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Handle: RePEc:cup:macdyn:v:7:y:2003:i:04:p:503-536_02

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  1. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August. [Downloadable!] (restricted)
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  5. Jean-Michel Grandmont, 1998. "Expectations Formation and Stability of Large Socioeconomic Systems," Econometrica, Econometric Society, vol. 66(4), pages 741-782, July.
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  9. James Bullard, 1991. "Learning equilibria," Working Papers 1991-004, Federal Reserve Bank of St. Louis. [Downloadable!]
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  12. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October. [Downloadable!] (restricted)
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  13. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August. [Downloadable!] (restricted)
  14. repec:att:wimass:19976 is not listed on IDEAS
  15. Evans, George W. & Honkapohja, Seppo, 1999. "Learning dynamics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 7, pages 449-542 Elsevier. [Downloadable!] (restricted)
  16. Bullard, James & Duffy, John, 1999. "Using Genetic Algorithms to Model the Evolution of Heterogeneous Beliefs," Computational Economics, Springer, vol. 13(1), pages 41-60, February. [Downloadable!]
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  17. repec:att:wimass:199530r is not listed on IDEAS
  18. Balasko, Yves & Royer, Daniel, 1996. "Stability of Competitive Equilibrium with Respect to Recursive and Learning Processes," Journal of Economic Theory, Elsevier, vol. 68(2), pages 319-348, February. [Downloadable!] (restricted)
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