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Asset Price Dynamics among Heterogeneous Interacting Agents

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  • Carl Chiarella

    ()

  • Mauro Gallegati
  • Roberto Leombruni
  • Antonio Palestrini

Abstract

In this paper, we investigate the presence of rationalherding on asset price dynamics during the intra-day trading withheterogeneous interacting agents, whose information set is notcomplete. In the model, individual probability measures offinancial investment strategies are defined using statisticalmechanics concepts. In addition, there is a learning processtoward the best strategy, implemented as a geneticalgorithm. Simulations show that imitative behavior can be arational strategy, since it allows an investor to gain excessreturns on an asset by exploiting information regarding pricedynamics not strictly contained in the fundamental solution. Herdbehavior is rational in the sense that it produces profits at theexpense of increasing the complexity of the system. Copyright Kluwer Academic Publishers 2003

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Bibliographic Info

Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 22 (2003)
Issue (Month): 2 (October)
Pages: 213-223

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Handle: RePEc:kap:compec:v:22:y:2003:i:2:p:213-223

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Keywords: asset price dynamics; rational herding; geneticalgorithms;

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References

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  1. Chiarella, Carl & He, Xue-Zhong, 2002. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model," Computational Economics, Society for Computational Economics, vol. 19(1), pages 95-132, February.
  2. C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 509-526.
  3. Kirman Alan & Teyssière Gilles, 2002. "Microeconomic Models for Long Memory in the Volatility of Financial Time Series," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(4), pages 1-23, January.
  4. Arthur, W Brian, 1994. "Inductive Reasoning and Bounded Rationality," American Economic Review, American Economic Association, vol. 84(2), pages 406-11, May.
  5. Lux, T. & M. Marchesi, . "Scaling and Criticality in a Stochastic Multi-Agent Model of a Financial Market," Discussion Paper Serie B 438, University of Bonn, Germany, revised Jul 1998.
  6. repec:att:wimass:9530 is not listed on IDEAS
  7. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
  8. W. Brian Arthur, 1992. "On Learning and Adaptation in the Economy," Working Papers 854, Queen's University, Department of Economics.
  9. Routledge, Bryan R, 1999. "Adaptive Learning in Financial Markets," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1165-1202.
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Citations

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Cited by:
  1. Chiarella, Carl & He, Xue-Zhong & Huang, Weihong & Zheng, Huanhuan, 2012. "Estimating behavioural heterogeneity under regime switching," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 446-460.
  2. Chang, Sheng-Kai, 2007. "A simple asset pricing model with social interactions and heterogeneous beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1300-1325, April.
  3. Huang, Weihong & Zheng, Huanhuan & Chia, Wai-Mun, 2010. "Financial crises and interacting heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 34(6), pages 1105-1122, June.
  4. Orlando Gomes, 2008. "Decentralized Allocation of Human Capital and Nonlinear Growth," Computational Economics, Society for Computational Economics, vol. 31(1), pages 45-75, February.
  5. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series 231, Quantitative Finance Research Centre, University of Technology, Sydney.
  6. Jiri Kukacka & Jozef Barunik, 2012. "Behavioural breaks in the heterogeneous agent model: the impact of herding, overconfidence, and market sentiment," Papers 1205.3763, arXiv.org, revised May 2013.
  7. Weihong HUANG & Wanying Wang, 2012. "Price-Volume Relations in Financial Market," Economic Growth centre Working Paper Series 1209, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.
  8. Gallegati, Mauro & Palestrini, Antonio & Rosser, J. Barkley, 2011. "The Period Of Financial Distress In Speculative Markets: Interacting Heterogeneous Agents And Financial Constraints," Macroeconomic Dynamics, Cambridge University Press, vol. 15(01), pages 60-79, February.
  9. Huang, Weihong & Zheng, Huanhuan, 2012. "Financial crises and regime-dependent dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 445-461.

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