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A Robust Rational Route to in a Simple Asset Pricing Model (revised March 2004)

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  • Hommes, C.H.

    (Universiteit van Amsterdam)

  • Huang, H.
  • Wang, D.

    ()
    (Peking University)

Abstract

We investigate asset pricing dynamics in an adaptive evolutionary asset pricing model with fundamentalists, trend followers and a market maker. Agents can choose between a fundamentalist strategy at positive information cost or choose a trend following strategy for free. Price adjustment is proportional to the excess demand in the asset market. Agents asynchronously update their strategy according to realized net profits in the recent past. As agents become more sensitive to differences in strategy performance, the fundamental steady state becomes unstable and multiple steady states may arise. As the traders' sensitivity to differences in fitness increases, a bifurcation route to chaos sets in due to homoclinic bifurcations of stable and unstable manifolds of the fundamental steady state.

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File URL: http://www1.fee.uva.nl/cendef/publications/papers/hhw2004March16.pdf
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Bibliographic Info

Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 02-08.

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Date of creation: 2002
Date of revision:
Handle: RePEc:ams:ndfwpp:02-08

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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
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Web page: http://www.fee.uva.nl/cendef/
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