A simple asset pricing model with two types of adaptively learning traders, fundamentalists and technical analysts, is studied. Fractions of these trader types, which are both boundedly rational, change over time according to evolutionary learning, with technical analysts conditioning their forecasting rule upon deviations from a benchmark fundamental. In a recent paper Gaunersdorfer and Hommes have shown that asset prices switch irregularly between two different regimes -- close to the fundamental price fluctuations with low volatility, and periods of persistent deviations from fundamentals where the market is dominated by technical trading -- thus, creating time varying volatility with autocorrelation structure similar to that observed in real financial data. Gaunersdorfer, Hommes, and Wagener propose two mechanisms as an explanation. The first is coexistence of a stable steady state and a stable limit cycle, which arise as a consequence of a so-called Chenciner bifurcation of the system. The second is intermittency and associated bifurcation routes to strange attractors. Both phenomena are persistent and occur generically in nonlinear multi-agent evolutionary systems. Further, in the case of a constant fundamental value we obtain return series with statistical properties closest to those of real data when EMH-believers and trend followers interact. In that case price series are close to having a unit root. In an extension of the model we replace the iid dividend process by a non-stationary process.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Workshop Papers, January 2001 with number
5A.1.
Length: Date of creation: 04 Jan 2001 Date of revision: Handle: RePEc:ams:cdws01:5a.1
Contact details of provider: Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands Phone: + 31 20 525 52 58 Fax: + 31 20 525 52 83 Web page: http://www.fee.uva.nl/cendef/ More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).
Related research
Keywords:
This paper has been announced in the following NEP Reports:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)