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Asset Price and Wealth Dynamics under Heterogeneous Expectations

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Author Info
Xue-Zhong (Tony) He (University of Technology Sydney)
Carl Chiarella (University of Technology Sydney)

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Abstract

In order to characterise price and wealth dynamics under the interaction of heterogeneous agents with a CRRA utility, a discrete time stationary wealth dynamics model in terms of return and wealth proportions (among different types of agents) is established. Fundamentalists and chartists are the main heterogeneous agents in the model. It is found that the presence of heterogeneous agents can lead the stationary model to have multiple equilibria. The equilibrium is unstable when the chartist extrapolation rate is high and (locally) stable when the rate is low. The convergence to the equilibrium follows an optimal selection principle --- the return and wealth proportion tends to one of the equilibria, which has relative higher return. The model that is finally developed displays the essential characteristics of the standard asset price dynamics model assumed in continuous time finance in that the asset price is fluctuating around an geometrically growing trend.

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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.2.

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Date of creation: 04 Jan 2001
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Handle: RePEc:ams:cdws01:5a.2

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  2. 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. 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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  6. Gaunersdorfer, Andrea, 2000. "Endogenous fluctuations in a simple asset pricing model with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 799-831, June. [Downloadable!] (restricted)
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  12. Lux, T. and M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
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  18. repec:att:wimass:19976 is not listed on IDEAS
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  20. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July. [Downloadable!] (restricted)
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  23. Bullard James, 1994. "Learning Equilibria," Journal of Economic Theory, Elsevier, vol. 64(2), pages 468-485, December. [Downloadable!] (restricted)
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  24. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-24, March. [Downloadable!] (restricted)
  25. Xue-Zhong He & Carl Chiarella, 1999. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset-Pricing Model," Computing in Economics and Finance 1999 223, Society for Computational Economics. [Downloadable!]
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  26. 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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