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More Hedging Instruments may destablize Markets Author info | Abstract | Publisher info | Download info | Related research | Statistics William Brock () (University of Wisconsin, USA)
Cars Hommes () (Universiteit van Amsterdam)
Florian Wagener () (Universiteit van Amsterdam)
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This paper formalizes the idea that more hedging instruments may destabilize markets when traders are heterogeneous and adapt their behavior according to experience based reinforcement learning. We investigate three different economic settings, a simple mean-variance asset pricing model, a general equilibrium two-period overlapping generations model with heterogeneous expectations and a noisy rational expectations asset pricing model with heterogeneous information signals. In each setting the introduction of additional Arrow securities can destabilize the market, causing a bifurcation of the steady state to multiple steady states, periodic orbits or even chaotic fluctuations.
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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number
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Date of creation: 22 Sep 2006Date of revision:
30 Apr 2008Handle: RePEc:dgr:uvatin:20060080Contact details of provider: Web page: http://www.tinbergen.nl/
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Keywords: Asset pricing hedging reinforcement learning nonlinear dynamics bifurcations Other versions of this item:
Find related papers by JEL classification: D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
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Valentyn Panchenko & Sergiy Gerasymchuk & Oleg V. Pavlov, 2007.
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