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Heterogeneous Beliefs, Risks and Learning in a Simple Asset Pricing Model

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Author Info
Carl Chiarella () (School of Finance and Economics, University of Technology, Sydney)
Tony He () (School of Finance and Economics, University of Technology, Sydney)

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Abstract

Trade among individuals occurs either because tastes (risk aversion) differ, endowments differ, or beliefs differ. Utilisating the concept of :adaptively rational equilibrium" and a recent framework of Brock and Hommes [6, 7], this paper incorporates risk and learning schemes into a simple discounted present value asset price model with heterogeneous beliefs. Agents have different risk aversion coefficients and adapt their beliefs (about future returns) over time by choosing from different predictors or expectations functions, based upon their past performance as measured by realized profits. By using both bifurcation theory and numerical analysis, it is found that the dynamics of asset pricing is affected by the relative risk attitudes of different types of investors. It is also found that the external noise and learning schemes can significantly affect the dynamics. Compared with the findings of Brock and Hommes [7] on the dynamics caused by chage of the intensity of choice to switch predictors, it is found that many of their insights are robust to the generalizations considered; however, the resulting dynamical behavior is considerably enriched and exhibits some significant differences.

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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 18.

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Date of creation: 01 Aug 1999
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Handle: RePEc:uts:rpaper:18

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July. [Downloadable!] (restricted)
  3. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December. [Downloadable!] (restricted)
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  4. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]
  5. Sethi, Rajiv, 1996. "Endogenous regime switching in speculative markets," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 99-118, March. [Downloadable!] (restricted)
  6. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  7. Franke, Reiner & Sethi, Rajiv, 1998. "Cautious trend-seeking and complex asset price dynamics," Research in Economics, Elsevier, vol. 52(1), pages 61-79, March. [Downloadable!] (restricted)
  8. Campbell, John Y & Kyle, Albert S, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 1-34, January. [Downloadable!] (restricted)
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  9. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October. [Downloadable!] (restricted)
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  10. repec:att:wimass:19976 is not listed on IDEAS
  11. Lux, Thomas, 1997. "Time variation of second moments from a noise trader/infection model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 1-38, November. [Downloadable!] (restricted)
  12. ., ., 1997. "," Journal of Accounting and Economics, Elsevier, vol. 24(2), pages 127-127, December. [Downloadable!] (restricted)
  13. Iori, Giulia, 2002. "A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 269-285, October. [Downloadable!] (restricted)
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  14. Troesken, Werner, 1997. "The," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(1), pages 1-25, April.
  15. repec:att:wimass:199530r is not listed on IDEAS
  16. Fedderke, J W, 1997. "The Source of Optimality in Action," Cambridge Journal of Economics, Oxford University Press, vol. 21(3), pages 339-63, May.
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