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Memory and Asset Pricing Models with Heterogeneous Beliefs

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Author Info
Verbic, Miroslav

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Abstract

The paper discusses the role of memory in asset pricing models with heterogeneous beliefs. In particular, we were interested in how memory in the fitness measure affects stability of evolutionary adaptive systems and survival of technical trading. In order to obtain an insight into this matter two cases were analyzed; a two-type case of fundamentalists versus contrarians and a three-type case of fundamentalists versus opposite biases. It has been established that increasing memory strength has a stabilizing effect on dynamics, though it is not able to eliminate speculative traders’ short-run profit seeking behaviour from the market. Furthermore, opposite biases do not seem to lead to chaotic dynamics, even when there are no costs for fundamentalists. Apparently some (strong) trend extrapolator beliefs are needed in order to trigger chaotic asset price fluctuations.

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File URL: http://mpra.ub.uni-muenchen.de/1261/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1261.

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Date of creation: 15 Aug 2006
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Handle: RePEc:pra:mprapa:1261

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Related research
Keywords: asset pricing biased beliefs contrarians fitness measure fundamentalists heterogeneous beliefs memory strength stability

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

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References listed on IDEAS
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  1. 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)
  2. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  3. Cars Hommes & Gerhard Sorger, 1997. "Consistent Expectations Equilibria," Tinbergen Institute Discussion Papers 97-051/1, Tinbergen Institute.
  4. William A. Brock, 1993. "Pathways to randomness in the economy: Emergent nonlinearity and chaos in economics and finance," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 8(1), pages 3-55.
    Other versions:
  5. Chiarella, Carl & He, Xue-Zhong & Hommes, Cars, 2006. "A dynamic analysis of moving average rules," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1729-1753. [Downloadable!] (restricted)
    Other versions:
  6. 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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  7. repec:cup:macdyn:v:2:y:1998:i:3:p:287-321 is not listed on IDEAS
  8. Honkapohja, Seppo & Mitra, Kaushik, 2003. "Learning with bounded memory in stochastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 27(8), pages 1437-1457, June. [Downloadable!] (restricted)
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  9. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2000. "Bifurcation Routes to Volatility Clustering," CeNDEF Working Papers 00-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    Other versions:
  10. LeBaron, Blake, 2000. "Agent-based computational finance: Suggested readings and early research," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 679-702, June. [Downloadable!] (restricted)
  11. Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan & van de Velden, Henk, 2008. "Expectations and bubbles in asset pricing experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 116-133, July. [Downloadable!] (restricted)
  12. Carl Chiarella & Xue-Zhong He & Peiyuan Zhu, 2003. "Fading Memory Learning in the Cobweb Model with Risk Averse Heterogeneous Producers," Research Paper Series 108, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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  13. Tesfatsion, Leigh S. & Judd, Kenneth L., 2003. "Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics," Staff General Research Papers 10368, Iowa State University, Department of Economics. [Downloadable!]
  14. 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)
  15. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2003. "Bifurcation Routes to Volatility Clustering under Evolutionary Learning," CeNDEF Working Papers 03-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
    Other versions:
  16. repec:att:wimass:192023 is not listed on IDEAS
  17. repec:att:wimass:19976 is not listed on IDEAS
  18. De Grauwe, Paul & Grimaldi, Marianna, 2006. "Exchange rate puzzles: A tale of switching attractors," European Economic Review, Elsevier, vol. 50(1), pages 1-33, January. [Downloadable!] (restricted)
  19. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February. [Downloadable!] (restricted)
    Other versions:
  20. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  21. Cars H. Hommes, 2005. "Heterogeneous Agent Models in Economics and Finance," Tinbergen Institute Discussion Papers 05-056/1, Tinbergen Institute. [Downloadable!]
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  22. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December. [Downloadable!] (restricted)
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