Asset Price Anomalies Under Bounded Rationality

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Asset Price Anomalies Under Bounded Rationality

Author Info

Emilio Barucci () (Universita di Pisa - Department of Economics)
Roberto Monte () (University of Rome Tor Vergata - Dipartimento di Studi Economici, Finanziari e Metodi quantitativi (SEFEMEQ))
Roberto Reno () (University of Siena - Department of Economics)

Abstract

We analyze the classical asset pricing model assuming non fully rational agents. Agents forecast future prices cum dividend through an adaptive learning rule. This assumption provides an explanation of some anomalies encountered in the empirical analysis of asset prices under full rationality: Returns are serially correlated (positively over a short horizon and negatively over a longer horizon) and the dividend yield predicts future returns (positive correlation). Considering the continuous time limit process, the same regularities are established analytically for price increments

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 19.

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Length: 22
Date of creation: 06 Jun 2003
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Handle: RePEc:rtv:ceisrp:19

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

Cited by:
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Kevin J. Lansing, 2005. "Lock-in of extrapolative expectations in an asset pricing model," Working Papers in Applied Economic Theory 2004-06, Federal Reserve Bank of San Francisco. [Downloadable!]
Other versions:
- Lansing, Kevin J., 2006. "Lock-In Of Extrapolative Expectations In An Asset Pricing Model," Macroeconomic Dynamics, Cambridge University Press, vol. 10(03), pages 317-348, March. [Downloadable!]

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