An Evolutionary CAPM Under Heterogeneous Beliefs
AbstractHeterogeneity and evolutionary behaviour of investors are two of the most important characteristics of financial markets. This papers incorporates the adaptive behaviour of agents with heterogeneous beliefs and establishes an evolutionary capital asset pricing model (ECAPM) within the mean-variance framework. We show that the rational behaviour of agents switching to better performing trading strategies can cause large deviations of the market price from the fundamental value of one asset to spill over to other assets. Also, this spill-over effect is associated with high trading volumes and persistent volatility characterized by significantly decaying autocorrelations of, and positive correlation between, price volatility and trading volume.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 315.
Date of creation: 01 Oct 2012
Date of revision:
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More information through EDIRC
evolutionary CAPM; heterogeneous beliefs; market stability; spill-over effects; volatility; trading volume;
Other versions of this item:
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-13 (All new papers)
- NEP-EVO-2012-10-13 (Evolutionary Economics)
- NEP-FMK-2012-10-13 (Financial Markets)
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