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Heterogeneous Beliefs and Instability

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  • Laurence Lasselle
  • Serge Svizzero

    (Réunion)

  • Clem Tisdell

    (Queensland)

Abstract

While Rational Expectations have dominated the paradigm of expectations formation, they have been more recently challenged on the empirical ground such as, for instance, in the dynamics of the exchange rate. This challenge has led to the introduction of heterogeneous expectations in economic modeling. More specifically, the forecasts of the market participants have been drawn from competing views. Two behaviours are usually considered: agents are either fundamentalist or chartist. Moreover, the possibility of switching from one behaviour to the other one is also assumed. In a simple cobweb model, we study the dynamics associated with Different endogenous switching process based on the path of prices. We provide an example with an asymmetric endogenous switching process built on the dynamics of past prices. This example confirms the widespread belief that fundamentalist market behaviour as compared with that of chartist tends to promote market stability.

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Bibliographic Info

Paper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 0111.

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Date of creation: Dec 2001
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Handle: RePEc:san:wpecon:0111

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Keywords: bounded rationality; chartists; chaos; fundamentalists; rational expectations.;

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  1. Laurence Lasselle & Serge Svizzero & Clem Tisdell, 2001. "Diversity, Globalisation and Market Stability," Discussion Paper Series, Department of Economics 0101, Department of Economics, University of St. Andrews.
  2. Vigfusson, R., 1996. "Switching Between Chartists and Fundamentalists: A Markov Regime-Switching Approach," Working Papers 96-1, Bank of Canada.
  3. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May.
  4. Hommes, C.H., 1999. "Cobweb Dynamics under Bounded Rationality," CeNDEF Working Papers 99-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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Cited by:
  1. João Luis Brasil Gondim & Marcos Costa Holanda, 2003. "Modelando o Câmbio Após a Estabilização," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] c32, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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