Heterogeneous expectations and speculative behavior in a dynamic multi-asset framework
AbstractFollowing the framework of a one risky - one riskless asset model developed by Brock and Hommes (1998), this paper considers a discrete-time model of a financial market where heterogeneous groups of agents allocate their wealth amongst multiple risky assets and a riskless asset. Agents follow different expectation formation schemes for both first and second moments of the distribution of returns. Instead of using a Walrasian auctioneer scenario as the market clearing mechanism, a market maker scenario is used. In particular, the paper focuses on the case of two risky assets and two agent types, fundamentalists and trend chasers. Conditions for the stability of the âfundamentalâ equilibrium are established in terms of the key parameters, in particular the extrapolation rate of the trend chasers and the weight of the two groups in the market. Numerical explorations are performed in order to analyze the combined effect of the interaction between heterogeneous traders and the diversification among multiple risky assets. Particular attention is paid to the effect of the correlation between the risky assets. It turns out that investorsâ anticipated correlation and portfolio diversification do not always have a stabilizing role, but rather may act as a further source of complexity in the financial market.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 62 (2007)
Issue (Month): 3 (March)
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Web page: http://www.elsevier.com/locate/jebo
Other versions of this item:
- Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2005. "Heterogeneous Expectations and Speculative Behaviour in a Dynamic Multi-Asset Framework," Research Paper Series 166, Quantitative Finance Research Centre, University of Technology, Sydney.
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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